DEAR BENNY: My wife and I want to give our two grown children an interest-free loan for $360,000. They currently have a 15-year fixed 5 percent loan for this amount for a second home they both enjoy. With our given money they can immediately pay off the bank loan and pay us back $4,587 per month for approximately 6.5 years.

The $4,587 is their current monthly payment. Staying with the bank loan, they would fully pay it off in seven years and 10 months. Paying the loan off 16 months early will represent a savings to them of more than $73,000.

Because this is a no-interest loan, we don’t think we are required to pay any taxes either to the federal government or to our state and local township. Our economic status is such that we can easily go forward with this plan. Are we missing something here? –Frank

DEAR FRANK: Yes, the IRS will consider that you are receiving interest (I call it "phantom interest") and will hold you responsible for including that in your annual tax return. The IRS publishes on a monthly basis what they call the "applicable federal rate" (AFR), which will spell out the amount of interest that you will be required to include as income to you.

Let me propose an alternative solution. Look at the AFR to determine the lowest interest rate you can charge your children. They will then sign a promissory note and a deed of trust (some jurisdictions use a mortgage), agreeing to pay you the principal plus interest on a monthly basis.

The mortgage document must be recorded among the land records in the country where the house is located.

You will receive monthly interest, which is ordinary income to you. Your children can deduct the interest they pay you from their tax returns.

And if you are so inclined, you can gift each of your children up to $13,000 per person every year. In other words, you and your wife can give each of your two children $26,000 every year. In your case, at the very least, you can give them back the interest that they are paying you.

In my opinion, that’s a cleaner way to do the transactions and is a win-win for everyone.

DEAR BENNY: You recently gave advice to someone who was trying to get rid of a time-share property and was concerned about what liability the heirs would have after his/her death. You said: "Yes, the time share will follow your heirs after your death. If you owe the company money and you die, your heirs will be legally obligated to continue making the payments."

This legal obligation would occur only if the heirs accept the inheritance. They, however, can refuse it. This should have been made clear; otherwise, people might logically assume from your advice that they have to accept their uncle’s beat-up Jeep or a property they don’t have any interest in obtaining. I think you missed stating that important intermediate step of acceptance. –Jeanine

DEAR JEANINE: It is not always easy to cover absolutely every aspect of a situation in a short newspaper column.

You are talking about a legal concept called "disclaimer." This is defined as an unconditional refusal to accept a gift of inheritance. For example, if you are to inherit your uncle’s beat-up Jeep (or his time share) you have the right to disclaim — i.e., tell the world that you do not want that gift.

State laws may differ, but in general the disclaimer must be made within nine months of the creation of the interest (in other words, when the will is accepted for probate).

So if you disclaim, what happens to the property? It generally will go to the next heir named in the last will and testament. If there is no such will, the probate court will distribute the property to the next-closest heir.

You must consult with an attorney knowledgeable about estate and probate law. This is a highly complex area of law.

DEAR BENNY: Our family has a vacant plot of land in a residential Chicago neighborhood. I wasn’t aware of this until four years ago when a couple of purchase solicitations came out of the blue via phone from tax buyers. In retrospect, we should have proceeded with the offer — first $2,000 and then $4,000 — as this was pre-recession. Instead, we paid the back taxes of about $20,000 and tried to sell the property. As the economy tanked and construction went under, any opportunities to sell dried up and I’m left with nothing but twice-a-year property taxes.

I recently solicited the lot to Habitat for Humanity, hoping to get a tax benefit for the donation. They took a look, apparently, but came back and said they weren’t interested. I originally made a proposal to the owner of the three-story condo next door, who could use this land as a large garden or another buildable area, but he wasn’t interested. Now the tenants use my lot for gardening and other outdoor activities, which doesn’t affect the lot in any way but does, admittedly, stick in my craw. Can you suggest any options to help me get this off my hands. –Don

DEAR DON: Have you tried giving the property to a charitable organization or a religious group? That would be my first recommendation.

Second, have you tried to sell it using a real estate agent? "Nothing ventured, nothing gained," as the saying goes.

Finally, you could just stop paying the real estate tax and let the city or county sell it at a tax sale. I am generally not an advocate of this approach, but in your case it may be your last resort.

DEAR BENNY: Do we have to do a HUD-1 form on a cash sale? The home is paid off and there is no lender involved. –Keith

DEAR KEITH: The answer is no. To explain to my readers, a HUD-1 is the form that is used for most residential real estate transactions. It is the "settlement statement" where the seller’s and buyer’s charges are listed, and reveals how much the buyer has to pay, and how much the seller will get.

If you are getting a mortgage, especially one that has federal (or Fannie Mae or Freddie Mac) involvement, you must use the HUD-1 form.

But in Keith’s case, he is selling property for all cash. While there should be some form of settlement statement (just in case the IRS decides to audit), he does not need to use the HUD-1.

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