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My mother would not be able to qualify. She is handicapped and has no job. She would, in theory, move in with us and we would use her properties to leverage as down payment for the house we would all live in…so I guess she would need to take out equity and give that money to me which I would then use as a down payment? I think there are severe tax penalties for doing this, which I of course would want to avoid.
But to simplify, I still am not sure of the basic principle of whether or not one should take out equity or simply sell the property for a down payment.
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It’s not tax penalty per-se. It’s just she needs to pay capital gains taxes on it, since none of them are her primary home. ( If any of them were, she wouldn’t have to pay any capital gains taxes on her primary up to $250k.) The good news is depending on her tax bracket it will be between 5-15%, most likely on the lower side. Her tax hit might actually not be that bad because, as you say, she has no income right now, and she has a medical disability. Have you tried figure out exactly how much taxes would be if she did sell? Easiest way to figure that out is get a copy of turbo tax and run through the numbers for her.
For any sort of cash-out refinance, you’ll be able to take out at most 85% LTV I believe anyway (So if your value is appraised at $120k, you can cash out a max of $102k I think).
Your capital gains taxes your mom will end up paying in the worst case scenaro 15% I think (it will be less most likely because of her tax bracket). So if she sells and pays taxes on a $120k sales price (assuming her cost basis is $0, her cost basis might be above $0, but let’s assume she’s had the property for a long time). She’ll get back $102k after paying taxes.
In terms of how much cash of her’s you can immediately use towards a down payment, it’s a wash.
I guess a bigger question is whether you want to deal with two rental properties in Riverside and Arizona, being that you will have so much on your plate already at home. Because eventually, you will be the one dealing with it (directly or indirectly).
Also, the question is, do you have any other siblings for which your mom might be wanting to at least partially willing/trusting part of her estate too? I mean, are you sure you are the 100% beneficiary of her estate? I ask because you’re considering taking on additional debt for long term. Can you count that 100% of her assets/income will go to you to help pay for that additional debt load?
