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Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2044
Experience:  Certified Public Accountant
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My husband and I are trying to move my dad into our home

Customer Question

Hello, my husband and I are trying to move my dad into our home after we build our new home. Because we are wanting to build and non-traditional type home (a barndominimum) we are not able to get a traditional construction loan that rolls into a mortgage. Our plan is to have my dad loan us the money (via a home equity loan) to build, then he moves into our home and takes over our current mortgage and we pay him loan payments. Please see below..we are needing help to meet our objectives and are unsure what documentation we will need to meet them!
Situation overview:
- Bri/Ryan purchased home (“Old Home”) in Jan 2016 for $150k then did a $65k renovation, $125k mortgage
- Bri/Ryan would like to build a new home (“New Home”) on their nearby land for ~$200k
- Dad owns home worth $200-240k in Houston (“Dad Home”), no mortgage
- Minimize taxes, fees, closing costs, etc.
- Use equity in Dad Home to partially fund Bri/Ryan New Home construction costs
- Once Bri/Ryan New Home complete, Bri/Ryan move in and Dad moves Old Home
- Dad sells Dad Home to repay equity line-of-credit
Possible Strategy:
- Dad takes out home equity line on Dad Home for $180k
- Dad loans $180k to Bri/Ryan to fund construction costs of New Home
- Once complete and all parties are moved into respective homes
- Dad pays rent to Bri/Ryan
- Bri/Ryan make loan payments to Dad
- Bri/Ryan make loan payments on Old Home
- Dad sells Dad Home to repay equity line of credit
- Considerations: Bri/Ryan would be taxed on rental income which could be partially offset by mortgage interest; Dad would incur interest income from repayment of loan by Bri/Ryan
Submitted: 11 months ago.
Category: Tax
Expert:  Mark Taylor replied 11 months ago.

Hi, my name is Mark. I will be happy to help you. The sale of your father's home in Houston would be tax free assuming that your father lived their for at least 2 of the past 5 years. Your analysis of the possible strategy appears correct. You would need to prepare a promissory note between you and your father regarding payment terms and an arm's length interest rate. The mortgage interest would be a rental expense to you and interest income to your father. The rental payments would be rental income to you. You would be able to depreciate the property that your father is living in.

Customer: replied 11 months ago.
Hi Mark, thank you so much for the response. Is the promissory note something we can draw up and keep in our files or is it something we would need to have a lawyer draw up and keep on record with them?
Expert:  Mark Taylor replied 11 months ago.

The promissory not is something that you could draft.

Expert:  Mark Taylor replied 11 months ago.

The capital gain at the federal level would be 15%. What state is the property in?

Expert:  Mark Taylor replied 11 months ago.

I hope you found this information to be beneficial. If this answered your question please take a few moments to rate my response. A rating is needed in order for me to receive credit for helping you today. The rating bar is located at the top of the page – ranging from 1 to 5 stars. If you need me to clarify aspect of my response or if there are additional areas of the question that you would like me to consider please let me know. I would be happy to continue the discussion. It has been my pleasure helping you today.