Tax Question - Inter-Family Loan/Mortgage?

Question

A couple years ago, my dad who is living overseas purchased a condo for me overseas. In order to avoid dealing with a mortgage and to have more flexibility, I have been making monthly payments with the average interest rate at the time to him directly (no bank, no mortgage). I have been deducting interest when I filed my taxes over the past couple years. Other than a seperate document that I developed that says I, Mr. XYZ, will be paying Mr. ABC the total amount with the following interest rate for the next 15 years, I don't have any other legal document. This so-called contract was both signed by me and my dad and legalized by the local authorities. By the way, technically, my dad does not have a lien on the condo (like banks do), it is in my name and I can sell it any time even if I stop paying him. I have been worried that if I get audited by the IRS, they may not buy my story although I have bank wire proofs showing monthly wires, but is that really enough?.

My second question is that the 'OFFICIAL CONTRACT', different from the one mentioned above, that is registered with the local authorities shows an amount lower that the other contract between me and my dad. We did that so the seller, my dad, would pay lower taxes at the time of the sale. This did not impact me because I am paying the agreed-upon price, the higher price, which is listed in the other document between me and him. Would the IRS question why am I paying a higher amount than the amount registered with the local authorities?

My final question is that I am getting ready to give my dad an amount higher than my monthly payment in my next payment (10 times my monthly payment) and I don't want to wire it because these days the US dollar is weak and the bank automatically converts the currency before they deposit the amount into his local account in local currency. My plan is hand him the amount CASH, so he can convert it at his convenience when the dollar goes up again. In other words, I won't have a wire receipt this time. How do I get some type of receipt that the IRS would deem acceptable in this situation?

Thank you very much in advance for any help you might provide me,

Answer 1

Have him give you a receipt for the cash. (Also, retain the ATM receipt in case the IRS alleges that he gave you a bogus receipt. However, the ATM receipt alone does not prove what you did with the cash.)

Other notes:
1) Expect to have some problems bringing such a large amount of cash through customs.
2) If he is not reporting to the IRS (and paying tax on) the money that you are paying him, expect an audit when they notice that his returns and yours disagree.

Answer 2

A couple of points.

1. The interest on this loan is NOT deductible on your tax return. To be deductible, the property MUST secure the loan. Your loan is a personal loan since the property does not secure payment. If challenged by the IRS, the deduction will be disallowed. Back taxes plus interest and penalties will be collected.

2. Your fraudulent contract will probably bite you in the backside when you sell if your numbers are challenged by the IRS. Since you used a lower amount for the contract, that's what the IRS will assume your basis to be. If the sale is taxable, you'll pay higher taxes because your basis will be lower.

3. The IRS has no interest in your payment, at least from a tax deduction perspective. Loan payments are not deductible and the interest on this loan isn't deductible so it's a moot point. However, if you pay him more than $10,000 at one shot or if aggregate payments over a short period of time exceed that amount, there are required reports that need to be filed with the Treasury Department. Additionally if you carry cash or negotiable instruments of $5,000 or more across international borders, reports are required to be filed, normally with both countries. Failure to file the reports may result in confiscation of the funds.

Whenever you skirt the system to try and save a few dollars there will be a downside at some point. Your legal house of cards could cost you dearly in the long run.

Answer 3

I would like to add: The USA is one of those countries that taxes your income from source abroad - so they are interested in your details. I have no idea what could or would trigger an audit. I too collect family interest payments but it is all conducted through a third party (title company) to avoid any impropriety. They submit all necessary tax documents. Your father had a gain on the sale of the house - which you under reported to the local government and would also be under reported on his tax return. You guys are sure playing on the edge.