 Bank
of Mom mortgage lending
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 Dear
Dr. Don,
My daughter is getting a divorce and will take on the home mortgage.
How do I go about loaning her the money to pay off the balance of
the mortgage ($90,000) and keep the IRS happy? Do I need the help
of a lawyer to do this?
-- Neva Note
 Dear
Neva,
Keeping the Internal Revenue Service happy about
the loan is very straightforward. The interest rate on the loan
has to be at least the applicable federal rate, or AFR, for a mortgage.
If the interest rate on the loan is less than the AFR, then the
difference in interest expense between the AFR and the mortgage
is considered a gift. This IRS
Web page provides the most recent AFR release.
You should talk to your tax professional about the
appropriate AFR for the loan, but currently long-term rates are
in the 4-percent-to-5-percent range, substantially lower than the
rate your daughter would be able to get from a conventional lender
for a 30-year fixed-rate mortgage. Bankrate's national average for
a 30-year fixed rate mortgage is 6.34 percent.
If you choose to lend her the money at a rate lower
than the AFR, there are no gift tax implications if the amount of
the gift is less than the annual exclusion. In the 2006 tax year
you can gift up to $12,000 under the annual exclusion or $24,000
for a married couple with gift splitting. This is another topic
to take up with your tax professional if you plan on lending your
daughter the money at a rate below the AFR.
Your daughter should make sure that there is no prepayment
penalty on her current mortgage before borrowing from the Bank of
Mom to pay off the note. She'll save a lot of money in closing costs
on the loan, but you'll have some closing costs to charge her on
the loan because you'll need a real estate attorney to draft the
note, record the lien on the deed, make a recommendation concerning
title insurance, etc.
She needs the loan to be secured by the home if she
plans on using the mortgage interest deduction on her taxes; you
want the loan secured to protect your investment. Alternately, a
firm like CircleLending
can act as the middleman for an intra-family loan and manage the
details of the loan, although you'll still want your attorney involved
in the process.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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