In her trust, a dear and wealthy friend of mine has stipulated that the house that I rent from her will be given to me upon her death. There is a mortgage on it and I would need to refinance it at the time I received it from the trust, so essentially she would be giving me her (considerable) equity in the property.
Recently, she decided that she wants me to have the house now for only what she owes on it (fair market value is about $400K; she owes $200K). But I can’t just buy it for $200K because when you sell a house for more than 25% under FMV, the IRS looks up on the difference as a gift and charges a 15% gift tax.
A mortgage broker has recommended that she give me the house through a “gift deed” – that is, she will put my name on the deed and remove hers. The mortgage will still be in her name (it is not an assumable mortgage). In effect, she will give me a $400K property for nothing while retaining responsibility for the lien. The broker suggests that I then get a one-year “private lender” interest-only personal loan, use the funds to pay off the mortgage, and, after the property has been in my name for a year, I can refinance with a traditional mortgage at a low rate. The personal loan would have to be secured with my equity in the house as collateral.
Does this sound kosher to you? I’m concerned that the IRS is not going to see how is this scenario is any different than just buying the house for $200K. I know, I know, you are not a lawyer, you are not giving me legal advice. I am waiting to hear back from an attorney about an appointment but I was hoping to get some input on this to clarify my thoughts. Any ideas are appreciated. Thanks.