Mr. Slant I’m just thinking out loud here, since you are borrowing the money against yourself, can’t you set your own interest rate at a rate higher then your 401K rate?
I know such a tax loophole exists, mainly by people making mega-bucks, but again don’t remember the details.
You’re missing the fact that there are two ends to the transaction. You can deduct the mortgage interest on your individual tax return. However, the corporation must declare that interest as income on its tax return, and the effect will balance out, at best. As others have pointed out, I think you will probably end up losing money.
Plus, it is the corporation that will owe the taxes, not your relatives in lower tax brackets. Your theory, I suppose, is that their income is sufficiently low that the interest income from the corporation would still be below the threshold at which they owed taxes. It doesn’t work that way.
But you’d like a cite for specific legals issues… ok. Tell me what state you live in and I’ll point you to the applicable state laws. I believe the legal issues would be:
mortgage fraud – You’ll need to demonstrate that the corporation actually distributed funds. You can’t do this unless you sell your house to a third party. Otherwise, your scheme claims the value of the house twice, which I believe would be illegal unless a transaction actually took place.
Tax fraud – which, as RickJay points out, follows from claiming the deduction for a loan which didn’t actually take place. People try this all the time by booking transactions between separate entitites which are actually the same (ie, two businesses or a business and an individual).
Most (all) states require mortgage brokers to be licensed, and if your corporation doesn’t follow their rules and procedures you’re subject to both fines and criminal prosecution.
State is given in my Location field and also mentioned in earlier posts… Texas.
I’m not sure where you get 1) from… I never claimed the value of my house twice. I create a mortgage loan with Controvert, Inc. Meanwhile, Controvert, Inc. holds the loan, collects payments (from me) and reports income (less the deductions from expenses). Furthermore, Controvert, Inc will be taxed at the corporate rate. Or, if it is an S Corp, income is legally shifted to family members in lower income brackets.
As for 2), a loan did take place.
Here’s a radical idea: go and ask a tax lawyer licensed in your jurisdiction.
It’s been said dozens of times, and i’ll say it again, that legal information from strangers on a message board is worth pretty much what you pay for it. I’m not saying that legal questions are wrong or should be forbidden, only that one of the reasons that lawyers go to law school and study for the bar is so that they can deal with issues that are more complicated than a simple “yes” or “no” answer.
While GQ is designed for questions with factual answers, and factual answers are sometimes possible even when the issue being discussed is a legal question, there are many questions where your own particular circumstances are crucial to the answer, and where even people with legal expertise may not be able to provide a definitive answer without knowing a whole bunch of specifics.
Some folks have given you answers based on their generalized understanding of tax law, as well as their understandings of the economics of tax abatement. While these may not be definitive, you seem like you’re going to keep insisting that they are irrelevant until you get the answer you want. If you’re not getting what you want here, then maybe you should think about paying a professional to handle this issue for you.
Good point.
Remember, the money I put back in by paying on the note is POST-TAX money.
The money I put in the 401K was tax-free.
Right now I’m paying on a 5.75% fixed note, and the money in my 401K is earning around 8-10%.
If I borrowed against myself, I’d be using money that’s making 8% to make 5.75%.
You know, you can buy into bond funds backed by mortgages. I haven’t checked, but I suspect they are paying close to mortgage rates. You can live dangerously and buy into a subprime mortgage fund too.
I’m not sure which family members you’re expecting to pass the money to, but minor children get taxed at the parents rate up to a certain age, just to avoid this kind of thing. In any case, the money is now owned by the family member. You may not want your kid to have a bunch of money when he turns 18.
BTW, there is no problem with loans among family members. Part of my mortgage is with my father in law, but it is real, with an actual document. I deduct the interest, just like my bank loan, and he reports the interest.
Thanks, Voyager! I found your post informative and helpful. Did you have to do anything special at closing, or was the mortgage done after the home was purchased?
No it doesn’t. The corporation starts with no assets. It has no money to lend you, and no money actually changes hands. You could use cash to fund the corporation if you have it, or you could use the equity in your house. But if you do the latter, you are counting the house twice. Once as an asset of the corportation, and again as collateral for the mortgage.
I am not your attorney and this post does not constitute legal advice. I hesitate to be more specific in offering a reply that is sufficiently detailed for you.
I’m going to join with the others in saying that if you don’t like the answers you’re getting here, consult a local tax professional. For your edification however, I’d suggest a layman’s reading of chapter 32 of the Texas penal code and chapters 24, 26, & 27 of the Texas Business & Commerce Code.
Among the “hoops” in Texas are demonstrating three years of experience in the field, posting a personal bond for $50,000, and paying a $500 annual fee. (link to FAQs from the Texas Department of Savings and Mortgage Lending)
Actually, it’s not necessary to jump through these hoops. AnswerBag.com had a pretty good explanation:
But where is Controvert Inc. getting the money from? Unless you have people interested in investing in this, it must come from you, right? Controvert Inc. cannot loan Controvert T. Individual any money unless Controvert Inc. actually has, you know, some money.
That’s only a problem if the kid knows that they have the money. Handle their taxes for them, get yourself as a co-owner of the account, and give their SSN and then never let the kid know that they even have an account.
Couldn’t Controvert, Inc. issue stock to raise capital? And I don’t suppose Controvert T. Individual is prevented from purchasing shares?