Inherited or gifted land and financing

etr2002June 12, 2011

I've been reading all the posts about financing. I still have some questions, though, and was hoping for some insight or at least opinions. My husband stands to inherit 100 acres of land, however my father-in-law knows we plan to build on that land and has offered to go ahead and deed it all to us now instead of waiting until his death. I read a post that stated the bank will take the value of the land and add it to the appraised value of the home and then require 20% down from there. Would it be wiser for us to go ahead and have him deed the entire acreage or just a small portion enough for the home itself? Would it matter if we have separate deeds - one for the land the home will be built on and then another for the remainder of the land?

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Looks like the post you read refers to a case in which the person also got money from the bank, to buy the land - whick is not your case.

    Bookmark   June 12, 2011 at 8:40PM
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I would think the land would be counted towards the downpayment so I would think the gift of the entire 100 acres would be for your benefit. The only way to really know is to talk to your banker.

    Bookmark   June 12, 2011 at 9:10PM
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While there are lots of generous and knowledgeable folks here, you should probably get professional legal/financial advice on a deal like this. Don't know if there are tax implications, etc., that might affect the deal, size of the deeded land, etc. Yes, the lender will get an appraisal of the project that will include the land and the loan to value will be calculated on the entire appraised value. I would think one benefit of a separate deed for just the house would be in the case of any default requiring foreclosure, the entire 100 ac would not be at risk.

If you have been reading the posts, then you know that what you/FIL think the land is worth may not match the appraiser's. Good luck!

    Bookmark   June 12, 2011 at 9:20PM
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From what I have learned between my husband being gifted a house & land and the financing of our own build on our acreage there are actually quite a few things to consider:

1) If the property is gifted, a gift tax will likely need to be paid. If & when you ever decide to sell any piece of gifted property, you will owe capital gains taxes on the difference between the value when gifted and the amount you sold it for less any cost of improvements.

2) Inheritance taxes may be owed (depends on the value of the estate at the time of your father in law's death). I believe the government is looking at increasing the percentage of inheritance taxes owed and lowering the thresholds. Again, depending on the value, you may be able to avoid it if pulling some aceage off now as a gift would reduce the value below at least the current inheritance tax threshold value.

3) How do you plan to finance the new home build? If you're going the route of a traditional bank, they typically don't like the house to be on more than 5 acres. If you go with a lender that specializes in larger tracts of land/home loans you can typically have as many acres as you like connected with the construction/home loan. Farm Credit has locations all over the nation that specialize in these types of loans. With the housing market crisis, alot of the total loan amount & value thresholds have changed, though so you'll want to check with your local branch. Typically they will set a 'value of the house' to 'value of the land' ratio that has to be met. (In our area I believe the value of the house had to be at least 35% of the total value of the house & land values together.)

4) Evaluate your risk. If you roll the house & land all together in 1 loan and default, the bank takes it all. If you finance only a part of the land & the house together and default the bank only gets that samller piece of land & the house sitting on it while you retain the remainder of the land.

5) Depending on the value of the house & land and the amount of money you have available for a downpayment, you may have to increase the amount of land you put with the house to either qualify for the loan or to avoid PMI.

Just some things to think about and investigate. I would definitely call the tax department, your CPA, your attorney, your preferred bank and/or Farm Credit (or other agricultural lender) and ask for their advice given your particular circumstances.

Here is a link that might be useful: Farm Credit Website

    Bookmark   June 12, 2011 at 9:52PM
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"My husband stands to inherit 100 acres of land, however my father-in-law knows we plan to build on that land and has offered to go ahead and deed it all to us now instead of waiting until his death. "

Talk with a tax attorney before doing this.

There are gift taxes (the giver pays, not the recipient, or the gift comes off the estate allowance).

You also get the givers cost basis for eventual sale.

If you inherit you get a stepped up cost basis.

There may be better ways (like paying 'ground rent') to avoid tax issues.

    Bookmark   June 13, 2011 at 10:19AM
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I agree with talking to a tax attorney or CPA. Your father-in-law could actually gift you the use of the land every year instead of charging rent. This would likely be below the annual reportable threshold for gift taxes.

    Bookmark   June 13, 2011 at 1:21PM
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Epiarch Designs

Sorry, no help on the large land part, but I might recommend checking out some other banks and getting their opinion and offers. We have one in town that will work with people to offset their downpayment if they have other methods of gaining a 20% value under final appraisal. Since I have construction and design background, we plan on building 90% of the house as well as designing it, which saves around 30-40% on the house cost. As long as what we spend is under 20% of the estimated value, they will count our sweat equity as your downpayment. I would think that much land would have some value towards the total value and they could work with you on lowering your 20% requirement.

    Bookmark   June 14, 2011 at 9:20AM
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LilFlowers MJLN

My husband inherited 40 acres and did not have to pay the gifted tax due to a crook trying to take the family land for himself through him being power of attorney and executor of estate to do as he bid. When we put a lien against the property, the bank asked for a title and a copy of his aunt's will. We had no problem with financing nor did we have to pay any kind of closing cost since we owned the property. They just included it. Of course, this is Louisiana. It was also almost 10 years ago. When we talked to the loan manager at the bank about building on the property, he informed us that we would have to have the land appraised again. He said that after it was appraised then we could see if we had the 20% down or if we would have to have an additional down payment. He also said that we would have to have the plans appraised so they could tell us how much of a down payment we needed. After much deliberation and due to my husband's job, we decided not to build on his inherited acreage and to buy another piece of land near his work place.

    Bookmark   June 14, 2011 at 7:57PM
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