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URL:  http://boards.fool.com/ok-so-tell-me-how-this-would-work-lets-say-21117625.aspx

Subject:  Re: private loan - details, details... Date:  8/5/2004  11:58 AM
Author:  irasmilo Number:  72738 of 121219

OK, so tell me how this would work...

Lets say, hypothetically, that "Good Friend Bob" and "Sponge John" decide to buy a property...

GFB offers to loan SJ his half of the down payment (lets say half is between 40 and 50k). This loan begins Jan 1, 2004 and was initially specified at 4.5% The loan term was 30 years, but SJ and GFB expect to sell the property in 7 years.

Would this loan be subject to these same rules as described in earlier posts?


Yes. If 4.5% is high enough to meet the minimum AFR on 1/1/04, everything is fine. When they expect to sell the property is irrelevant.

Also, what would happen if SJ decided that he and GFB entered into a purchase that was losing money, and they decided to drastically lower the interest rate so SJ doesnt lose his shirt in interest (for fun, lets assume the rate drops to an absurd 1%)... What would the tax implications be here? Would SJ have to claim the 4% diff on the August rate as a gift?

Not sure what the 4% difference is that you refer to, but if the adjusted rate of 1% is below the AFR at the time the rate is adjusted, the difference between the 1% and the AFR will still be reported by GFB as income. Additionally, if the dollar difference between the AFR interest and the interest actually paid by SJ is greater than $11,000, GFB will have to file a Gift Tax Return (although he probably won't have to pay any tax at this time).

TIA!
Kris

PS-- what would SJ have to do to be able to deduct interest on the down payment akin to a mortgage...?


He would have to use his share of the property as collateral for the loan and have the loan recorded as a mortgage with the appropriate governmental body.

Ira
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