Discussion:How does this deal smell to you?

Two realtor friends of mine, asked me what I thought of the following scenario:

Woman wants to buy a $1.5M+ home and will use $500K gift from well-to-do fiancee as down payment.

IRS will be told, if they ask, that $500K was a loan (for which she will have signed a note, payable starting in 5 years or so, well after they're married).

However, the lender will be told that $500k is gift from fiancee to woman, cuz lender won't lend if the woman is borrowing for a down payment.

My first reaction is that it is never a good idea to give two different stories to two different (potential) participants in the transaction.

Secondly, the fiancee should prepare a gift tax return to report this huge gift and pay taxes on it.

Apparently this scheme is being concocted to keep the fiancee's ex-wife from somehow intervening or souring the deal.

My overriding reaction is that at best this is sneaky, and unethical. At worst I fear its illegal.

I recall buyers were always told they could not borrow a downpayment for a home. It was more debt and would screw up the debt-to-equity ratios and all of a sudden, they don't qualify. Therefore, they became "gifts." Hence, that's what the lender "wants to hear."

And I bet one of the real estate agents probably has documents drafted for a loan. I've seen that before. The other agent has documents showing "gift." Seen that too.

Fred's approach is interesting. Heck, what if they don't get married? The guy is left holding the bag on $500K? I doubt it. I am sure he's going to want his money back. I doubt I would loan $500K to someone and not want it back.

Tom

The bid deal is mortgage fraud. Must the borrower cum donee own 100% of the house? I would think you could consider it as the Sugar Daddy buying an interest in the house, and not have to worry about gift vs loan.

Yes, Tom, I was also wondering what happens if they don't get married.

Mortgage fraud is not inaccurate, but I wasn't kidding when you should see some of the things they do to sell houses. I wouldn't be shocked if this deal went through somewhere. Maybe not under this scenario, but someone's hamsters are going to work overtime at some mortgage company to put this deal together.

Newtaxguy, tell your realtor friend's that they better be sure their insurance is paid up. Not only that, they need to be certain their broker would sign off on the deal. The broker's rear end is on the line too.

Tom

On the one hand, there is no loan fraud if the lender guidelines allow for gift loans in the deal to the extent that you provide. Once the home is purchased and the deed is conveyed to the buyer, the moneyman, has no dog in the hunt. Maybe some crooked lawyer could get his money back but I don't see how. Several states (maybe most) have homestead laws that would prevent him from taking the house from her. I know FL homestead property is protected.

You are correct that if they have a properly executed note, then yes, there would be load fraud.

On the other hand, are the issues with the IRS compliance of moving money around.

I this scenario falls apart when she deposits the $500k to her account and the IRS is put on notice of the >$10k transaction. Based on my experience (as a mortgage broker) the lender will definitely want to see that the deposit was, in fact, made and a statement from the bank showing that the funds were absolutely in her account prior to cutting the cashier's check.

And you wonder why the real estate bubble burst.

This scenario is why I'm a bit reluctant to have my tax dollars used to bail out the folks that were involved in these transactions over the last few years.

Fred, is your solution legal?!?!?.....maybe in Nevada <eg>

The reason they aren't looked on in the same vein is because they are cheating banks instead of the little people <they are helping them, lol>. We all see the increase in salesprice with a seller's conession. Hmmmm, used to raise appraisal value maybe. Talk about racket. Heck, I've had one scenario where the seller raised the price and actually kicked back the money to the buyer. then complained when he had a larger capital gain on the sale of the rental property. Hello, you can't list kickback as transaction deduction on the tax return. He wasn't happy about the money he "gifted" back to the buyer.

Anyway, lying makes life more complicated, and more costly in many cases. It's so hard to put an end to it because some people are indeed successful at it. Then, I have found that some people enjoy the game, literally, like gambling addicts. Maddening.

You, yourself, must never be seen as counseling such a thing (or you can find yourself in the middle of a civil RICO, or worse). What I am saying is that you cannot give a tax opinion about an endeavor that is facially illegal, to the extent that it is illegal; and you would be insane to use the mail, or the phone,[both broadly speaking] to further it.