GMAC Real Estate Keep the Mortgage in Hand
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Keep the Mortgage in Hand

Takeaways

  • Carry the note yourself only for family, or very trusted buyers.
  • Make the transaction airtight in the eyes of the IRS with full paperwork and an appropriate minimum interest rate.

Did you know?

  • The IRS makes the applicable federal rate available each month in the Internal Revenue Bulletin.
Get all aspects of the sale in writing. If you are selling a second home, there may be times when you’ll want to "play bank" and carry the mortgage note yourself. This approach only makes sense in very limited circumstances, such as if you are selling to long-term tenants of a rental second home or if your kids are buying your vacation second home. Carrying the note yourself has some risks, but you always retain the option to foreclose on the property and regain the title.

You do need to take steps to make the transaction airtight in the eyes of the IRS. Particularly if you’re selling to your kids. Get everything down in writing including a Note and Deed of Trust for the amount of the sale. The monthly payments must include at minimum the applicable federal rate (AFR). This rate is significantly below the commercial mortgage rate and is available each month in the Internal Revenue Bulletin.

When selling to a non-relative you're most likely going to charge a much higher rate, but if you are "helping" your kids buy the second home it’s very important to charge them at least the minimum interest on the loan. If you don’t charge the minimum interest, or if you begin forgiving payments, the IRS may decide to step in declare the sale a below market bargain sale. This will create some serious tax implications.

Becoming a "bank" and holding the mortgage on the sale of your second home is not something you’re likely to consider, but in certain circumstances that might be a viable financing option for a buyer you trust.

Search for Second Homes for Sale

To search for a selection of second homes for sale, please visit lifestylehomesearch.com, or visit the website of a GMAC Real Estate Office that serves the area where you'd like to buy a second home. To learn more about buying Second Homes or Vacation Homes, explore the rest of this section, or contact a GMAC Real Estate Agent.