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Roger
Roger, Lawyer
Category: Real Estate Law
Satisfied Customers: 26556
Experience:  BV Rated by Martindale-Hubbell; SuperLawyer rating by West
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We are considering pulling funds from my husbands 401K (he

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We are considering pulling funds from my husbands 401K (he is 62) and also using some savings in order to buy a house for our son and his family. Our plan is to purchase the house and "sell" it to them for a monthly payment that will include taxes and insurance but no interest. We would also specify a term (one that makes the payment affordable for them and provides a monthly check for us) This would mean that we would be receiving the re-payments monthly instead of keeping the lump sum in our accounts. What are the tax implications of something like this?
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  Roger replied 1 year ago.

Kirk Adams : Hi - my name is XXXXX XXXXX I'm a Real Estate litigation attorney. Thanks for your question. I'll be glad to help.
Customer:

Thank you.

Kirk Adams : Are you asking about the tax consequences of withdrawing the money OR do you want to know about the taxes associated with you selling the house to your son and then being paid back?
Customer:

I suppose a little of both, although we know that there will be a tax imposed on the withdrawal, we are more concerned about how it is viewed (income?) as we are getting paid back. In our thinking, it would not be income since it is a repayment, but that is what we really don't know. We would sell him the house, hold the papers (seller financing) and receive only principal, no interest.

Kirk Adams : The taxation on the distributions would be based on the income tax rate you have, which could be 10% to 35%.
Kirk Adams : That would be something that your CPA can tell you as he/she would have information regarding your income.
Kirk Adams : As for the taxation on the "purchase" of the house by your son.......
Kirk Adams : If you sell the house to your son/deed the property to him and have him sign a deed of trust and promissory note for exactly what you paid for the property with no interest, there should be no capital gains - - so no taxation.
Customer:

Nice! that is what we were hoping for but we just weren

Customer:

weren't sure

Kirk Adams : If you were gaining interest on the payments, or charging more than exactly what you paid, there would be capital gains.
Customer:

I'm sure there are some forms that we can get to help with this - where would we look to find the deed of trust and promissory notes?

Customer:

Yeah, we don't want to make a profit on this, just get paid back.

Kirk Adams : Also, I would recommend that you consult your accountant to see if there are any other tax-savings issues that he/she can recommend for you. I'll be the first to profess that I'm not an accountant, so there could be more helpful things you could do.
Customer:

Ok, thank you!

Kirk Adams : IN FACT, I think it's possible to actually purchase property through your IRA - - that way, there would be no distributions, and if you just sell the house to them, then the IRA may be able to reconcile the transfer and lessen your tax implications.
Kirk Adams : Something like this could be even better than cashing out the money and then buying the house, only to transfer it to your son.
Customer:

REALLY!!! That is definitely something that we would like to look into!

Kirk Adams : Yes, I've had a few clients do this (they were in a similar situation as you).
Kirk Adams : Here's an article about this: http://www.marketwatch.com/story/how-to-buy-real-estate-in-an-ira-2013-04-02
Customer:

Thank you!

Kirk Adams : Sure.
Kirk Adams : Talk to your accountant about this, and then consult your IRA's account manager regarding the process to get this done.
Customer:

We definitely will do more research with this new information.

Kirk Adams : I definitely think it's worth looking into.
Customer:

I think so too.

Kirk Adams : It would likely be much easier to purchase the property through the IRA and because he's over 59 1/2, there would be distribution penalties if he turned around and sold it to your son.
Customer:

That really sounds like a viable option and one that we had not even knew existed.

Kirk Adams : But, the process is something that a CPA or account manager would structure and then send it to an attorney like me to process the title change/exchange money, etc.
Customer:

Understood.

Kirk Adams : Ok. Please let me know if you have any additional questions. I'll be glad to help if I can.
Customer:

Thank you so much!

Kirk Adams : Here's a better article that outlines the options you have - - including purchasing the property through your 401k: http://www.realestate.com/advice/should-i-use-my-401k-for-real-estate-investing-35469/
Customer:

Thank you -

Kirk Adams : Again, there may be a hitch that prevents this, and if it does, you can go back to a traditional distribution and then use the money to buy the property, and then turn around and sell it to your son for the same amount - - which should prevent you from having any capital gains to be taxed on.
Customer:

That's great - thank you for this information - it will get us going with our research and definitely will assist with the deicison.

Kirk Adams : I would HIGHLY RECOMMEND that you consult a local real estate attorney to help with this either way as it's a little complicated and you want to make sure it's done right.
Customer:

Will do, we just weren

Kirk Adams : IF you have any further questions, let me know. IF we're done, please remember to rate our conversation so I get credit for my time.
Kirk Adams : Thanks again!
Customer:

weren't sure which direction to take at this point. we will definitely find a local resource to assist.

Customer:

thank you for your time and the information!

Roger, Lawyer
Category: Real Estate Law
Satisfied Customers: 26556
Experience: BV Rated by Martindale-Hubbell; SuperLawyer rating by West
Roger and 12 other Real Estate Law Specialists are ready to help you
Expert:  Roger replied 1 year ago.
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