[SDEngineer]

[quote=jimmyle]I have several questions for a friend who has too much cash but low reported income. He is buying a house right now and suddenly needs to put $240K into his bank. He plans to give cash to his sister and brother and they write him a check as a gift.

1. Can his brother and sister give him a cash gift? what is the limit? what are the tax consequences?

2. Same question for nephews and nieces.

Thanks,

[/quote]

I can tell you that your friend had better have a really good explanation for the money no matter how he gets it into his account.

Large cash deposits are flagged by banks to both the IRS and the FBI. It won’t matter how the money gets in (small incremental deposits or large ones), nor will it matter whether he has enough relatives (unlikely) to re-gift him his own funds under the taxable gift limit (I believe 13K is the current limit).

Pretty much, he’s guaranteed both an audit and an investigation for money laundering. And since he’s committing tax fraud, the best he can hope are some pretty stiff fines (assuming that the cash is from under-the-table type work, and is not actually ill-gotten gains).

Edited to add:

Having read the reply above, I’m afraid his best course (assuming the sale was recent) is simply to take the tax hit and declare and deposit the money himself. Have him talk to a CPA to find out what his tax obligations are in this situation (it’s unusual, and I have no idea how the IRS would treat it). He’ll still get audited (that much cash movement is virtually guaranteed to draw an audit), and very well might draw the attention of the FBI, but he’ll be above board and legal, and as long as he pays the due taxes (whatever they happen to be), nothing bad will occur.

Again, if he attempts to use a gifting scheme to move that much money into his account and avoid taxes, he is committing tax fraud. He might wind up losing ALL of the cash to penalties and fines.

[SDEngineer]

[quote=ybitz]Aye…why are prices still so high relative to people’s incomes, despite the high foreclosure rates?[/quote]

Depends on where you’re talking about.

So Cal historically has had pretty high ratios – that’s nothing new…it’s simply an area that theres high demand to live in. Rent rates are also high in So Cal – and again, always have been.

I remember back when I got my first solo apartment back in the early 90’s for $600 a month – in the depths of a recession. Same 1 BR in a nice area in any city not on the West Coast (except NY or Boston) would’ve run me $300-$400. I could’ve bought a 3BR house in a lot of places for my rent payment.

In places like the midwest, historically, nearly 70% of households own their own home. In San Diego, the highest ownership figure ever was at about 57% in the late 60’s. Most years it’s down in the 51-55% range. It’s simply a demand factor – all other things being equal,would you rather live in Kansas City, or San Diego? Unfortunately, the flip side of the demand is supply, and so other things are not equal – prices are higher here.

As Rich pointed out in his blog post not too long ago, for San Diego, prices are now relatively in line with their historical averages (not that there won’t be some overshoot to the downside, but that is also normal market behavior in a bubble bust).

San Diego is simply one of those places where the median income will not be able to buy a median house – but that’s nothing new – it’s been that way since WW II (as far back as reliable records go for real estate here).

[SDEngineer]

[quote=ybitz]Aye…why are prices still so high relative to people’s incomes, despite the high foreclosure rates?[/quote]

Depends on where you’re talking about.

So Cal historically has had pretty high ratios – that’s nothing new…it’s simply an area that theres high demand to live in. Rent rates are also high in So Cal – and again, always have been.

I remember back when I got my first solo apartment back in the early 90’s for $600 a month – in the depths of a recession. Same 1 BR in a nice area in any city not on the West Coast (except NY or Boston) would’ve run me $300-$400. I could’ve bought a 3BR house in a lot of places for my rent payment.

In places like the midwest, historically, nearly 70% of households own their own home. In San Diego, the highest ownership figure ever was at about 57% in the late 60’s. Most years it’s down in the 51-55% range. It’s simply a demand factor – all other things being equal,would you rather live in Kansas City, or San Diego? Unfortunately, the flip side of the demand is supply, and so other things are not equal – prices are higher here.

As Rich pointed out in his blog post not too long ago, for San Diego, prices are now relatively in line with their historical averages (not that there won’t be some overshoot to the downside, but that is also normal market behavior in a bubble bust).

San Diego is simply one of those places where the median income will not be able to buy a median house – but that’s nothing new – it’s been that way since WW II (as far back as reliable records go for real estate here).

[SDEngineer]

[quote=ybitz]Aye…why are prices still so high relative to people’s incomes, despite the high foreclosure rates?[/quote]

Depends on where you’re talking about.

So Cal historically has had pretty high ratios – that’s nothing new…it’s simply an area that theres high demand to live in. Rent rates are also high in So Cal – and again, always have been.

I remember back when I got my first solo apartment back in the early 90’s for $600 a month – in the depths of a recession. Same 1 BR in a nice area in any city not on the West Coast (except NY or Boston) would’ve run me $300-$400. I could’ve bought a 3BR house in a lot of places for my rent payment.

In places like the midwest, historically, nearly 70% of households own their own home. In San Diego, the highest ownership figure ever was at about 57% in the late 60’s. Most years it’s down in the 51-55% range. It’s simply a demand factor – all other things being equal,would you rather live in Kansas City, or San Diego? Unfortunately, the flip side of the demand is supply, and so other things are not equal – prices are higher here.

As Rich pointed out in his blog post not too long ago, for San Diego, prices are now relatively in line with their historical averages (not that there won’t be some overshoot to the downside, but that is also normal market behavior in a bubble bust).

San Diego is simply one of those places where the median income will not be able to buy a median house – but that’s nothing new – it’s been that way since WW II (as far back as reliable records go for real estate here).

[SDEngineer]

[quote=ybitz]Aye…why are prices still so high relative to people’s incomes, despite the high foreclosure rates?[/quote]

Depends on where you’re talking about.

So Cal historically has had pretty high ratios – that’s nothing new…it’s simply an area that theres high demand to live in. Rent rates are also high in So Cal – and again, always have been.

I remember back when I got my first solo apartment back in the early 90’s for $600 a month – in the depths of a recession. Same 1 BR in a nice area in any city not on the West Coast (except NY or Boston) would’ve run me $300-$400. I could’ve bought a 3BR house in a lot of places for my rent payment.

In places like the midwest, historically, nearly 70% of households own their own home. In San Diego, the highest ownership figure ever was at about 57% in the late 60’s. Most years it’s down in the 51-55% range. It’s simply a demand factor – all other things being equal,would you rather live in Kansas City, or San Diego? Unfortunately, the flip side of the demand is supply, and so other things are not equal – prices are higher here.

As Rich pointed out in his blog post not too long ago, for San Diego, prices are now relatively in line with their historical averages (not that there won’t be some overshoot to the downside, but that is also normal market behavior in a bubble bust).

San Diego is simply one of those places where the median income will not be able to buy a median house – but that’s nothing new – it’s been that way since WW II (as far back as reliable records go for real estate here).

[SDEngineer]

[quote=ybitz]Aye…why are prices still so high relative to people’s incomes, despite the high foreclosure rates?[/quote]

Depends on where you’re talking about.

So Cal historically has had pretty high ratios – that’s nothing new…it’s simply an area that theres high demand to live in. Rent rates are also high in So Cal – and again, always have been.

I remember back when I got my first solo apartment back in the early 90’s for $600 a month – in the depths of a recession. Same 1 BR in a nice area in any city not on the West Coast (except NY or Boston) would’ve run me $300-$400. I could’ve bought a 3BR house in a lot of places for my rent payment.

In places like the midwest, historically, nearly 70% of households own their own home. In San Diego, the highest ownership figure ever was at about 57% in the late 60’s. Most years it’s down in the 51-55% range. It’s simply a demand factor – all other things being equal,would you rather live in Kansas City, or San Diego? Unfortunately, the flip side of the demand is supply, and so other things are not equal – prices are higher here.

As Rich pointed out in his blog post not too long ago, for San Diego, prices are now relatively in line with their historical averages (not that there won’t be some overshoot to the downside, but that is also normal market behavior in a bubble bust).

San Diego is simply one of those places where the median income will not be able to buy a median house – but that’s nothing new – it’s been that way since WW II (as far back as reliable records go for real estate here).

[SDEngineer]

[quote=Bob]

I have nothing against the person who started this thread, but lets suppose he/she purchases a home for $450K with 5% down. There’s a real possibility that by the end of the year this person will have a property that’s only worth $400K, yet will be forking out big monthly payments on a house that has depreciated in value. Is it still a great deal then ? This person will be just another statistic on the verge of a potential foreclosure if his/her income decreases for whatever reason.

Once again, my advice would be to find a home that is affordable at a much lower price range that reduces the financial risk. [/quote]

It’s not particularly risky at the level they’re talking about though. I’m in very nearly the same place they are in (same income level, buying a home that I will have about a 400K mortgage on). At this level, the total mortgage burden (PITI and all ancillaries like HOA’s, etc) winds up being 23% of my gross monthly. This is extremely affordable territory – and leaves me with well over 6 months of reserves. How affordable is it? Remember, we’re currently at pretty ridiculously low fixed rates – I’m locking in tomorrow at 4.375% (using 2 seller paid points). The payments on a 400K loan at 4.375% are roughly equivalent to the payment on a 325K loan with more normal (say 6.5%) interest rates. Essentially, if you buy a house at todays interest rates at 3x income, the actual payment is closer to a 2.5x income ratio payment under more normal interest rates.

I did some calculations the other day based on what the payment will be and what my positive cash flow will be after the purchase. I could afford to take a 20K/yr pay cut and not even feel it (other than my bank account wouldn’t be cash flow positive, but it wouldn’t interfere with planned expenses like nights out, vacations, etc). A 30K/yr pay cut would be doable and still make ends meet by cutting out things like vacations and economizing in other areas (no dinners out, etc). 40K/yr if I sold my car and bought a cheap reliable used car cash if it was absolutely necessary. Mostly just to see exactly how affordable it was, since my industry is pretty recession resistant.

Will the value of the house drop in the short term? Very likely – in fact, I’d say almost certainly. Will it make any difference to how affordable the payment currently is? Not in the least – and since I don’t plan on moving for quite a few years, I’ve got a long time for inflation (which most posters here will say is certainly coming) to bring the value of the house back up.

[SDEngineer]

[quote=Bob]

I have nothing against the person who started this thread, but lets suppose he/she purchases a home for $450K with 5% down. There’s a real possibility that by the end of the year this person will have a property that’s only worth $400K, yet will be forking out big monthly payments on a house that has depreciated in value. Is it still a great deal then ? This person will be just another statistic on the verge of a potential foreclosure if his/her income decreases for whatever reason.

Once again, my advice would be to find a home that is affordable at a much lower price range that reduces the financial risk. [/quote]

It’s not particularly risky at the level they’re talking about though. I’m in very nearly the same place they are in (same income level, buying a home that I will have about a 400K mortgage on). At this level, the total mortgage burden (PITI and all ancillaries like HOA’s, etc) winds up being 23% of my gross monthly. This is extremely affordable territory – and leaves me with well over 6 months of reserves. How affordable is it? Remember, we’re currently at pretty ridiculously low fixed rates – I’m locking in tomorrow at 4.375% (using 2 seller paid points). The payments on a 400K loan at 4.375% are roughly equivalent to the payment on a 325K loan with more normal (say 6.5%) interest rates. Essentially, if you buy a house at todays interest rates at 3x income, the actual payment is closer to a 2.5x income ratio payment under more normal interest rates.

I did some calculations the other day based on what the payment will be and what my positive cash flow will be after the purchase. I could afford to take a 20K/yr pay cut and not even feel it (other than my bank account wouldn’t be cash flow positive, but it wouldn’t interfere with planned expenses like nights out, vacations, etc). A 30K/yr pay cut would be doable and still make ends meet by cutting out things like vacations and economizing in other areas (no dinners out, etc). 40K/yr if I sold my car and bought a cheap reliable used car cash if it was absolutely necessary. Mostly just to see exactly how affordable it was, since my industry is pretty recession resistant.

Will the value of the house drop in the short term? Very likely – in fact, I’d say almost certainly. Will it make any difference to how affordable the payment currently is? Not in the least – and since I don’t plan on moving for quite a few years, I’ve got a long time for inflation (which most posters here will say is certainly coming) to bring the value of the house back up.

[SDEngineer]

[quote=Bob]

I have nothing against the person who started this thread, but lets suppose he/she purchases a home for $450K with 5% down. There’s a real possibility that by the end of the year this person will have a property that’s only worth $400K, yet will be forking out big monthly payments on a house that has depreciated in value. Is it still a great deal then ? This person will be just another statistic on the verge of a potential foreclosure if his/her income decreases for whatever reason.

Once again, my advice would be to find a home that is affordable at a much lower price range that reduces the financial risk. [/quote]

It’s not particularly risky at the level they’re talking about though. I’m in very nearly the same place they are in (same income level, buying a home that I will have about a 400K mortgage on). At this level, the total mortgage burden (PITI and all ancillaries like HOA’s, etc) winds up being 23% of my gross monthly. This is extremely affordable territory – and leaves me with well over 6 months of reserves. How affordable is it? Remember, we’re currently at pretty ridiculously low fixed rates – I’m locking in tomorrow at 4.375% (using 2 seller paid points). The payments on a 400K loan at 4.375% are roughly equivalent to the payment on a 325K loan with more normal (say 6.5%) interest rates. Essentially, if you buy a house at todays interest rates at 3x income, the actual payment is closer to a 2.5x income ratio payment under more normal interest rates.

I did some calculations the other day based on what the payment will be and what my positive cash flow will be after the purchase. I could afford to take a 20K/yr pay cut and not even feel it (other than my bank account wouldn’t be cash flow positive, but it wouldn’t interfere with planned expenses like nights out, vacations, etc). A 30K/yr pay cut would be doable and still make ends meet by cutting out things like vacations and economizing in other areas (no dinners out, etc). 40K/yr if I sold my car and bought a cheap reliable used car cash if it was absolutely necessary. Mostly just to see exactly how affordable it was, since my industry is pretty recession resistant.

Will the value of the house drop in the short term? Very likely – in fact, I’d say almost certainly. Will it make any difference to how affordable the payment currently is? Not in the least – and since I don’t plan on moving for quite a few years, I’ve got a long time for inflation (which most posters here will say is certainly coming) to bring the value of the house back up.

[SDEngineer]

[quote=Bob]

I have nothing against the person who started this thread, but lets suppose he/she purchases a home for $450K with 5% down. There’s a real possibility that by the end of the year this person will have a property that’s only worth $400K, yet will be forking out big monthly payments on a house that has depreciated in value. Is it still a great deal then ? This person will be just another statistic on the verge of a potential foreclosure if his/her income decreases for whatever reason.

Once again, my advice would be to find a home that is affordable at a much lower price range that reduces the financial risk. [/quote]

It’s not particularly risky at the level they’re talking about though. I’m in very nearly the same place they are in (same income level, buying a home that I will have about a 400K mortgage on). At this level, the total mortgage burden (PITI and all ancillaries like HOA’s, etc) winds up being 23% of my gross monthly. This is extremely affordable territory – and leaves me with well over 6 months of reserves. How affordable is it? Remember, we’re currently at pretty ridiculously low fixed rates – I’m locking in tomorrow at 4.375% (using 2 seller paid points). The payments on a 400K loan at 4.375% are roughly equivalent to the payment on a 325K loan with more normal (say 6.5%) interest rates. Essentially, if you buy a house at todays interest rates at 3x income, the actual payment is closer to a 2.5x income ratio payment under more normal interest rates.

I did some calculations the other day based on what the payment will be and what my positive cash flow will be after the purchase. I could afford to take a 20K/yr pay cut and not even feel it (other than my bank account wouldn’t be cash flow positive, but it wouldn’t interfere with planned expenses like nights out, vacations, etc). A 30K/yr pay cut would be doable and still make ends meet by cutting out things like vacations and economizing in other areas (no dinners out, etc). 40K/yr if I sold my car and bought a cheap reliable used car cash if it was absolutely necessary. Mostly just to see exactly how affordable it was, since my industry is pretty recession resistant.

Will the value of the house drop in the short term? Very likely – in fact, I’d say almost certainly. Will it make any difference to how affordable the payment currently is? Not in the least – and since I don’t plan on moving for quite a few years, I’ve got a long time for inflation (which most posters here will say is certainly coming) to bring the value of the house back up.

[SDEngineer]

[quote=Bob]

I have nothing against the person who started this thread, but lets suppose he/she purchases a home for $450K with 5% down. There’s a real possibility that by the end of the year this person will have a property that’s only worth $400K, yet will be forking out big monthly payments on a house that has depreciated in value. Is it still a great deal then ? This person will be just another statistic on the verge of a potential foreclosure if his/her income decreases for whatever reason.

Once again, my advice would be to find a home that is affordable at a much lower price range that reduces the financial risk. [/quote]

It’s not particularly risky at the level they’re talking about though. I’m in very nearly the same place they are in (same income level, buying a home that I will have about a 400K mortgage on). At this level, the total mortgage burden (PITI and all ancillaries like HOA’s, etc) winds up being 23% of my gross monthly. This is extremely affordable territory – and leaves me with well over 6 months of reserves. How affordable is it? Remember, we’re currently at pretty ridiculously low fixed rates – I’m locking in tomorrow at 4.375% (using 2 seller paid points). The payments on a 400K loan at 4.375% are roughly equivalent to the payment on a 325K loan with more normal (say 6.5%) interest rates. Essentially, if you buy a house at todays interest rates at 3x income, the actual payment is closer to a 2.5x income ratio payment under more normal interest rates.

I did some calculations the other day based on what the payment will be and what my positive cash flow will be after the purchase. I could afford to take a 20K/yr pay cut and not even feel it (other than my bank account wouldn’t be cash flow positive, but it wouldn’t interfere with planned expenses like nights out, vacations, etc). A 30K/yr pay cut would be doable and still make ends meet by cutting out things like vacations and economizing in other areas (no dinners out, etc). 40K/yr if I sold my car and bought a cheap reliable used car cash if it was absolutely necessary. Mostly just to see exactly how affordable it was, since my industry is pretty recession resistant.

Will the value of the house drop in the short term? Very likely – in fact, I’d say almost certainly. Will it make any difference to how affordable the payment currently is? Not in the least – and since I don’t plan on moving for quite a few years, I’ve got a long time for inflation (which most posters here will say is certainly coming) to bring the value of the house back up.

[SDEngineer]

[quote=EmilyHicks]I have around $45,000 in my 401K and my husband has around $30,000. Can I withdraw some of this money at no penalty? We have no money in IRA. I have looked at houses in the $350,000 range but most are too old or in bad neighborhoods.[/quote]

You can usually (depending on plan administrator) take a loan against some portion of your vested 401K account (most cases I believe it’s 50%). It must be repaid, with interest (but at least the interest is going to yourself, so that’s not a big deal) over the loan period (I think mine allows 15 years for a loan taken out for a primary residence purchase).

There’s a caveat to this – if your 401K is through work, and you lose your job, you may be required to payback that loan in an accelerated manner (60-90 days). If you do not, it is treated as a withdrawal and you will be subject to large tax penalties.

[SDEngineer]

[quote=EmilyHicks]I have around $45,000 in my 401K and my husband has around $30,000. Can I withdraw some of this money at no penalty? We have no money in IRA. I have looked at houses in the $350,000 range but most are too old or in bad neighborhoods.[/quote]

You can usually (depending on plan administrator) take a loan against some portion of your vested 401K account (most cases I believe it’s 50%). It must be repaid, with interest (but at least the interest is going to yourself, so that’s not a big deal) over the loan period (I think mine allows 15 years for a loan taken out for a primary residence purchase).

There’s a caveat to this – if your 401K is through work, and you lose your job, you may be required to payback that loan in an accelerated manner (60-90 days). If you do not, it is treated as a withdrawal and you will be subject to large tax penalties.

[SDEngineer]

[quote=EmilyHicks]I have around $45,000 in my 401K and my husband has around $30,000. Can I withdraw some of this money at no penalty? We have no money in IRA. I have looked at houses in the $350,000 range but most are too old or in bad neighborhoods.[/quote]

You can usually (depending on plan administrator) take a loan against some portion of your vested 401K account (most cases I believe it’s 50%). It must be repaid, with interest (but at least the interest is going to yourself, so that’s not a big deal) over the loan period (I think mine allows 15 years for a loan taken out for a primary residence purchase).

There’s a caveat to this – if your 401K is through work, and you lose your job, you may be required to payback that loan in an accelerated manner (60-90 days). If you do not, it is treated as a withdrawal and you will be subject to large tax penalties.

[SDEngineer]

[quote=EmilyHicks]I have around $45,000 in my 401K and my husband has around $30,000. Can I withdraw some of this money at no penalty? We have no money in IRA. I have looked at houses in the $350,000 range but most are too old or in bad neighborhoods.[/quote]

You can usually (depending on plan administrator) take a loan against some portion of your vested 401K account (most cases I believe it’s 50%). It must be repaid, with interest (but at least the interest is going to yourself, so that’s not a big deal) over the loan period (I think mine allows 15 years for a loan taken out for a primary residence purchase).

There’s a caveat to this – if your 401K is through work, and you lose your job, you may be required to payback that loan in an accelerated manner (60-90 days). If you do not, it is treated as a withdrawal and you will be subject to large tax penalties.

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