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Subject:  Re: Using Mom's money Date:  6/11/2003  3:25 PM
Author:  TMFPixy Number:  36516 of 91080

Greetings, Krisitef, and welcome. You asked:

The owners owe $310,000 on an SBA loan for the building. They need this loan paid off before they can sell the restaurant and will owner finance the rest of the loan. The building would serve as collateral for the loan, but we have little cash in the bank, not close to 10%or 20% of the amount we would need. My husbands mother is 73, owns her house outright and has several hundred thousand dollars in IRA's, stocks, bonds, etc. What would be the tax ramifications (or other ramifications)if she cashed out enough to buy the building? She could then hold title for the building and rent it back to us.

If your M-I-L takes the entire $310K from previously untaxed monies in her IRA(s), then all of the withdrawal counts as income and she would owe ordinary income tax on the entire amount taken. Further, to avoid penalties on the distribution she almost certainly must make an estimated income tax withholding payment for the quarter in which she makes the IRA withdrawal. If she fails to do that, then not only would she still owe the income taxes, but she would also have to pay a very, very substantial penalty at income tax time.

If only some of the money comes from the IRA(s) and the rest from investments like stocks or bonds held in after-tax accounts, then the IRA withdrawal will still be taxed as explained above. For that portion of the funding derived from her other investments, she would owe capital gains taxes on any gains over her original basis in those investments. Again, it might be necessary for her to file and pay estimated income tax withholdings in the quarter the withdrawal from the IRA(s) and the liquidation of investments occur.

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