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Crazy Legal Question: Morgages/Taxes and Contributions(4 posts)

Crazy Legal Question: Morgages/Taxes and ContributionsKristin
Aug 23, 2002 9:52 AM
Ready for a crazy question. In 1999, I made a large charitable commitment to be paid out over 3 years. At the time, I didn't anticipate purchasing a home. I'm prepared to renig on this committment, but for many reasons I'd rather not. Truth is, I really need to move and I can't make sense out of renting when interest rates are so low and FHA wants to make my down payment.

This morning I had an epiphany. What if I look for a property that is valued $x.xx under my purchase price (x being the remainder of my committment), then offer the seller $x.xx over the purchase price in exchange for them making an immediate donation of $x.xx to the charity. It seems that everyone wins. I roll my committment into a 30 year mortgage which eventually gets lost in equity, the seller gets a nice little tax benefit, and the charity gets its money two years early. Only one question: is it legal??

Oh, State of Illinois.
a messDougSloan
Aug 23, 2002 10:38 AM
First, the seller and you are typically required to dislose at closing whether the buyer is getting any "kick back" from the seller. I think what you describe might be, because it is being done for your benefit. If you don't disclose it, that could be criminal fraud.

Second, you may not be able to obtain a loan in excess of the true purchase price, or an appraisal by someone hired by the lender. So, you may not be able to do this at all.

Third, the excess money you pay the seller might be ordinary income, if not in reality paid for the home itself, subject to income tax, but potentially offset by the charitable deduction, assuming the seller can take full advantage of it. Likely you will not be able to take advantage of the deduction, with the convoluted method of payment.

The extra money you pay to the seller, if rolled into your loan, could be very expensive in the long haul. Work out the interest on that separately.

The extra price, combined with a low down payment, might cause you to have to pay extra for Private Mortage Insurance (PMI), which will at least last longer due to the higher loan amount compared to value. This is another way the extra amount may cost you.

I'm not a tax consultant, nor am I familiar with your laws there; this is more of a lay perspective from someone vaguely familiar with some of the pertinent laws, plus a little common sense; before you do this, though, I'd certainly speak to some sort of tax adviser, and definitely disclose what you are doing to your lender and the FHA. Taxes are one thing, but criminal prosecution for fraud is a bit worse.

Bottom line, it's creative, I think it's a mess and I would not do it.

Doug
BummerKristin
Aug 23, 2002 10:49 AM
It was really just an idea. I would not have dreamed of trying to take a tax benefit for myself in all of this. I would, instead, consider myself as having defaulted on a debt. Thus, would accept the larger cost to me over the long run as a result of my choice. If I break my promise, I fully expect it to cost me something. My only goal in all of this is to see the charity compensated at the amount I promised in 1999. But what you said above makes sense. It was a creative idea, but I was concerned about the legalalities, which is why I asked.
doesn't sound legal...ask a lawyer to be sure (nm)ColnagoFE
Aug 26, 2002 9:36 AM