Legal Question in Real Estate Law in Pennsylvania

Re: Mortgages

Sure it's 'legal', but those IRS bastards may tax the lender on the interest they COULD charge. In other words if the lender was entitled to charge you interest, then they would be entitled to collect an additional $3,000/yr. You are allowed to give away money you already have, but here they see it as you giving away money you should have made that they could tax them on. If you gave it away the IRS may also be able to tax the giftee on the $$ gift, so in effect, the interest free loan you are speaking about would mean you found a loop hole where the IRS misses the opportunity to tax the mortgageor on their interest income, and possibly the giftee on their income/gift.

The IRS could even impute additonal income to YOU. They do this with waiters, etc. The idea here is that if you are not being charged interest on paper, it is the same as someone giving you back money. For example, if you pay $12,000 /yr on the mortgage, but if it was a conventional mortgage with interest you may be paying $15,000/yr. The IRS could treat this as a gift to you of $3,000/yr, and thus income in the year in which you are entitled to the income. [Note: If the loan is from your parents, they can gift you up to $10,000/yr. tax free.]

Good health and good luck to you,

Kevin J. Begley