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Feds likely to frown upon buyer’s crafty plan

Dear Benny: If I buy a house outright for my aunt for $459,900 (fair-market-value), what is the best way for me to transfer ownership to her without tax consequences?

I know that the gift tax exclusion is now $13,000. I’m not married and neither is my aunt.

I understand that you would probably recommend I have her sign 35 promissory notes of $13,000 each, plus one for $4,900, then just forgive each note annually for 36 years. However, I’d rather not drag it on for that long, if possible.

I was thinking of doing it indirectly through 35 trustworthy people, like giving each of them a $13,000 share of the property that they can just re-gift to my aunt.

Would the best way be: (1) having 35 people sign promissory notes that I can immediately forgive, then having her sign a promissory note to each person that they can immediately forgive or (2) somehow signing over a $13,000 share of the property to each person that they can just re-gift to my aunt? Do you have a better suggestion? – Ashley

Dear Ashley: I do not provide specific legal advice to my readers. I can give only general information and always urge my readers to consult with their own tax and legal advisers.

You certainly are creative, but I suspect that the IRS (and possibly your state government) will consider this a scam designed to avoid either capital gains tax or gift tax or both.

First, even if would fly legally, I cannot believe you can find 35 people who would be willing to stick their respective necks out for your scheme. And if you sign over any portion of your property, I suspect that you will have to pay a lot of recordation and transfer taxes to your local taxing authority.

Have you considered having your aunt buy the property with your guarantee to the lender? That’s one possible scenario. Another is to see if you can add your aunt to the title, even though you will be the only person signing the promissory note to your lender.

Alternatively, can you afford to lend your aunt the money so that she can buy the house in her own name? She can sign a promissory note, secured by a deed of trust (called a mortgage in some areas), and you will be the lender. Then you can gift her a portion of the property each year based on a percentage that does not exceed $13,000. And to avoid the situation where this has to go on for years, you can also include her as the beneficiary of your last will and testament.

I welcome other suggestions from my readers.

Dear Benny: On July 30, I had settlement on the purchase of my first home.

It was an FHA mortgage and the mortgage insurance premium was financed. The upfront fee was approximately $5,500 and the monthly MIP was approximately $144.

I received a letter on Sept. 18 from the bank that bought my mortgage telling me that I would no longer be required to pay the mortgage insurance premium because it was not disclosed to me in my closing documents and that any premium already collected would be reimbursed in approximately 30 days.

I have not received any reimbursement, but my monthly mortgage bill has been reduced and does not include the MIP. When I called the lender, they told me to check with the title company or the original lender.

The title company referred me to that original lender who insisted everything was disclosed correctly and that they never heard of such a thing. They feel that my new lender made a mistake. They agreed to check on it for me but never called me back.

Who do you think has the money? Do you think I am entitled to reimbursement of the $5,500? If so, I would definitely want to pursue this. If not, I made only one monthly premium of $144, which may not be worth the hassle of figuring out what is going on.

Also, if I pursue this, they may indeed have made a mistake and I may then have to begin making the additional payments.

What would you suggest? – Jenna

Dear Jenna: Interesting. I rarely hear of a lender giving up money.

I suppose you could independently — without identifying yourself or your loan account number — research the matter.

Try reviewing the information about mortgage insurance premiums on the Internet. This may assist you in determining if, in fact, you are obligated to obtain such insurance.

Typically, if you do not put down 20 percent of more of the purchase price of your house, you have to obtain MIP. This protects the lender should you go into default.

My take: Don’t rock the boat but keep the letter from your lender stating that you do not need that insurance. They may come back to you later, and your letter will be your best defense.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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