Buying a house from my mom

Hopefully someone can help me here.

My mom has been more than kind in allowing me for the past five years to live in the house that my grandfather gave her before he passed away (it was before he got sick so I guess it would be a gift and not an inheritance). This was rent free so that I could get my debts paid off, get established and then I could buy the house. Well time has come and I went to get the loan and I?m a little confused about what they are telling me, especially since I don?t want mom to have to pay extra taxes and fees on my account. Here is what the Loan officer is telling us.

1. They want mom to gift me $10,000 equity in the house (they have made it seem that if she doesn?t I can?t get the loan).

2. They have said that she will need to pay 30% capital gains tax on the entire selling price (since the house was a gift to her and is not her residence they said it would be considered pure profit) including the $10,000 equity gift.

3. The they say there are closing cost that she has to pay.

Is all of this true?

Thank-you for any help or information you can provide

#1. I am guessing that the bank is telling you that your down payment isn't large enough.

#2. Don't ever take tax advice from a Banker. She should however try and determine what your Grandfather paid for the house and what other major improvements were made to the house. From how you describe the situation that will be her basis, and the difference between that and the selling price (less expenses) will be what she will pay capital gains tax on. By the way is this house her primary residence?

#3. Again, I think the bank feels that you don't have sufficient funds to qualify for the mortgage and by having her pay the closing costs you will just make it.

The IRS would let your mother exempt $250,000 of gains on the property is she has lived there for 2 of the past 5 years. It sounds like she hasn't. That would mean that it is not her primary residence and is not eligible for the exemption. If it was gifted to her then I believe her basis (cost) is zero thus raising her tax liability. The other issues sound like you are short on down payment money. If she could re-establish legal residency in the house the capital gains tax could be avoided.

Also, depending on her financial situation she could write the note herself with you paying her a market interest rate.

J Edward

When the property was gifted to your mother she also received your grandfathers basis in the property, so it is not zero,unless you are unable to determine your Grandfathers basis.