Construction Loan.. Purchase Price vs. Assessed Value

Jason143NBPDApril 21, 2014

Just wondering if anyone has any information on this. I am starting up the construction loan approval process and was wondering if anyone could help with some insight. The property that we are planning to build on was formally owned by a close relative who wanted to gift it to me and my fiance.. Instead of doing a straight gift process it was "sold" for 1.00. Talking with our contact at the bank he said he would have to look into this further as normally if the property is transfered less then 12 months they go by the purchase price.. Obviously the property is worth more then 1.00 but that is the "purchase" price.. Can I opt to use the assessed value being that we only did the transfer 1 month ago? Or are we going to be forced to stay with the purchase price of 1.00?

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The government is going to view that transaction as a gift, and so should your bank.

    Bookmark   April 21, 2014 at 6:50PM
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So the bank then should use the assessed value of the land for loan purposes.. Because whether or not something is gifted it still holds a market value.. I am still bringing that land to the table when it comes to building a home and the land will add value to the home that the bank is financing.. While I may not have personally paid for the property it still holds a substantial value... I just cant see what me paying for the property has to do with anything..

    Bookmark   April 21, 2014 at 7:57PM
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They will grill you about the taxes on the land. It really shouldn't matter as you own the land and it has value apart from what you paid. Unfortunately they evaluate the transaction as part of the loan process and that type of sale is going to red flag you.

It is possible they will ask for further documentation that you paid taxes on the assessed value. You cannot gift for an arbitrary amount to avoid taxes and gifting laws. I wonder if it would almost be better to leave your family member's name on it and make them part of the loan process? Just thinking out loud. My husband and I had totally legitimate finances that were red flagged all over for risk. We closed finally and you will too, get ready to jump many a hoop :)

    Bookmark   April 21, 2014 at 8:15PM
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Talk to your real estate attorney. Property in NJ is quite commonly transferred and recorded with a $1.00 purchase price. Transferring property is not like buying a car. You do not have to pay any sales tax or upfront property taxes so no need to prove any of that to anyone. The bank should use the assessed or market value or comps. This is such a common practice here in NJ that if your bank doesn't understand it, you should try a different bank or at least a different loan officer. And you should definitely have an attorney on board. What bank are you using for your loan?

    Bookmark   April 21, 2014 at 9:02PM
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Hmmm. Wish we could do that here in WA. Good luck!

    Bookmark   April 21, 2014 at 9:08PM
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If the land is already transferred, you don't need an attorney. And YOU don't pay income taxes on land that was gifted to you. Each person has an annual cap on their gifting limit. Then, the rest is suppose to be tabulated and goes against a total gift allowance (use to be 2 million per person) at their death. The amount is significantly above 2 million now. Then all assets above the lifetime limit the year of their death gets taxes at estate tax rates.

You have the option of checking with other banks too. Land is transferred all the time for $1 and other consideration. I think many people have found that when they buy the land (even at 100K), they still need to bring 20% or so to the table. If you are already planning to bring about that to the table, probably not much to worry about. If the land was you planned equity, then probably a good idea to get with some other banks. Would be a bummer if you were 2 months out, and this bank changed their mind!

    Bookmark   April 21, 2014 at 11:09PM
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The land is not planned equity.. The build is looking to be somewhere between the 350-450k range.. Still in planning sessions.. Right now we are just doing the pre approval to find out exactly what we are approved for so we can build accordingly.. We have 100k set aside specifically for the build.. We have other finances but have this amount set aside that will be dedicated as down payment towards build.. So depending on the actual house size we will need to borrow somewhere in the 250k-350k range.. Large range but again has a lot to do with what we finalize on with regards to plans..

    Bookmark   April 21, 2014 at 11:22PM
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