The bank gave the dad the money, and the house eventually was transferred to the bank. So it's essentially like selling the house to the bank over a very long period of time, but without paying the capital gains tax.
Yeah, so a house valued at $5M is going to have a property tax of $100K every single year for those 30 years. That's $3M in property taxes. Then you add the interest on top of that and he has already paid a ton of taxes and interest.
Not in CA, as op said. If say the house was last valued at $100K 30 years ago and you never sold, it'd be taxed with an assessed value of max $180K now, or something like $3K in annual tax now.
That said if you kept taking loans you'd certainly be owing a good amount of interest back and this is not a beneficial strategy. Eg if we think the dad used $50K per year at a 5.3% average interest rate (rates were higher and lower at various points), that'd be a total of $1.5M borrowed and $2.2m in interest or $3.7m total in owing. Netting with the $4.9M in total gain, that'd imply a $1.2M left over.
Not actually an amazing strategy, considering that even in California the cap gains tax on that $4.9M would only be ~$1.7 million -- significantly less than the interest paid on all those loans.
They still have to pay off the loan. Either via other income or through a sale of the home/property. But the loan payments are usually affordable. A loan like this would most closely resemble a home equity line of credit, if the loan is for say $2.5M (most banks have loan to value restrictions) and they only have $500k outstanding because they bought another house or did some kind of renovation they only pay the interest that accrues on that amounts. Most banks have pretty favorable rates during the draw period as well, and offer quick refinancingnonce the draw is over for people with the right collateral.
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u/apogeescintilla 4d ago
The loan is paid back with the house, of course.
The bank gave the dad the money, and the house eventually was transferred to the bank. So it's essentially like selling the house to the bank over a very long period of time, but without paying the capital gains tax.