Although engaging in any financial dealings with family or business friends can be fraught, it also can be fraud if the transfer of ownership of real estate is not conducted at arm’s length.
I came across a reminder about the danger of selling property to your brother-in-law or best business bud in a recent bankrate.com column by Steve McLinden, who cautions readers that. . .
there is an Identity of Interest Certification form you may need to fill out if you’re getting your mortgage through the Federal Housing Administration, or FHA. The Internal Revenue Service is also interested in non-arm’s-length transaction disclosure for different reasons. . .
He notes that lenders and taxing authorities look especially close at relationships in short sales these days because so many family members have bought underwater residences to lease back to struggling occupants.
As for the IRS, the issue pivots on the tax consequences of giving a gift.
If you sell property to that brother-in-law of yours below the market, the difference between what an outside buyer would pay and what a family member coughs up is a gift. For single individuals, there’s no tax for a gift up to $13,000 annually; for married couples, it’s double that amount.
An independent appraisal on the home would give both of you an up-to-date valuation and fair-market value that should help stand up to IRS scrutiny, McLinden says. “Also realize that once you buy the home, your local property-tax assessor will calculate your taxes based on what your place is worth, not what you paid for it,” he adds.
Can you cheat on your taxes? Of course. Can you get away with it? You’re welcome to find out.
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