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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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I TOOK 20,000.00 OUT OF MY IRA AND LOANED IT TO MY GRANDDAUGHTER

Customer Question

I TOOK 20,000.00 OUT OF MY IRA AND LOANED IT TO MY GRANDDAUGHTER TO BUY A HUD HOUSE BECAUSE SHE WAS FORECLOSED ON HER HOUSE. SHE PAYS ME 200.00 A MONTH TO PAY BACK THE LOAN.( 200.00 A MONTH FOR 10 YEARS). My question is since I have to pay taxes on he $20,000. how can I pay the least possible tax. I am 64,laid-off made 13,000.00 in earned income. unemployment income 11,599.00 social security 4,155.00.my spouse made 17,119.00 unemployment.
Submitted: 5 years ago.
Category: Tax
Expert:  BK-CPA replied 5 years ago.

BK-CPA :

Hello and thank you for your question.

Customer :

Hello

BK-CPA :

Your income is of the nature where a large tax bill could potentially be looming. Social security benefits can become taxable and to greater extents, there isn't always withholding on the unemployment amounts, and the IRA distribution will be treated as ordinary income unless you were able to somehow complete a rollover (put the money back) within your window.

Customer :

I know.

BK-CPA :

You are not going to want to hear this, but there is interest revenue on that loan you made too. The $20,000, whether or not you collect the interest or not, does have 'interest' that can be imputed by the IRS should you fail to.

BK-CPA :

Uncollected interest is a gift, but there is still interest...

BK-CPA :

(same as though the interest were paid and immediately returned to the payor as a gift)

Customer :

no I didnt know that. What if my name is on the house also it already s

Customer :

I am listed as owner with granddaughter at court house

BK-CPA :

To reduce your tax liability, you are going to be looking to claim deductions and credits on your tax returns. Home mortgage interest, taxes, charitable contributions, investment expenses, tax preparation fees, medical expenses, etc., are all examples of potential deductions that you could claim. There are credits too, such as for energy efficient improvements to your home, if you made any....

BK-CPA :

The loan is a personal loan from you to her...

Customer :

none of my deducti

Customer :

yes

BK-CPA :

...and she is expected to repay... then it's a loan, and loans have interest.

BK-CPA :

There may have been a gift in place at the time of purchase too if you are on the title.

Customer :

ye we gifted the money then they put my name after fact at court house

BK-CPA :

If you end up paying her loan (you may be on the loan too, and not just the title to the house, or just on the loan but not on the title to the house..., please clarify), and you are on the title to the house, then you can generally deduct the interest as either investment interest or perhaps qualified residence intererst...

BK-CPA :

IRC 163 has the rules for deducting interest, noting the regulations too.

Customer :

the title to the house their is no other loan on it

Customer :

the house is paid off

BK-CPA :

Alright. So you would be gifting the home to her then, save for the loan. As she pays you back and eventually assumes full title to the house, it will be a return of basis to you save for interest (imputed or otherwise).

BK-CPA :

ie... your initial basis in the home is $20K and you are selling it in installments for $20K over the years implies you have no gain(loss) to recognize upon the receipt of each installment.

BK-CPA :

Just interest.

Customer :

there is no loan papers.. can i change it to a rental

BK-CPA :

If the underlying situation is that she is buying the home, then it is not a rental. Will you keep title after the $20,000 is paid or will you be out at that point?

Customer :

no there's no gain or loss just interest

Customer :

i will be out . what about rent to buy

BK-CPA :

It would function the same way, meaning like a sale-type lease.

Customer :

ok thank you

BK-CPA :

I do appreciate your question.

Customer :

Have a great day Thanks very much.

BK-CPA :

You too. My last suggestion would be to consider doing a tax projection so you know if there will be a balance due or not ahead of time. Afterall,

BK-CPA :

...April surprises are not fun.

BK-CPA :

Start with Form 1040 ES here:

BK-CPA :

If you do owe tax or should be making estimated tax payments, the above form will provide instructions for you.

BK-CPA :

I do hope this information is helpful to you.

BK-CPA :

Is there a particular deduction or credit that you are curious about?

Customer :

Yes, it is helpful to me. Thank you. No none.

BK-CPA :

If you think of something else, feel free to come back. I'll switch to Q&A mode and you can refresh the screen / revisit this at any time. Thank you again!

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