Cash-out refinance or home equity to buy-out siblings shares of father's house?

I am named on the deed of my father's house, which he willed to be divided between his 5 sons. I would prefer to keep the house, which is mortgage-free, and rent it out as an investment. My brothers want their shares of the proceeds from the sale of the house, which is appraised at $225K. Each sibling would get $45K. What's the best way to borrow the $180K to buy-out my siblings? Are there tax implications when the borrowed money goes to my siblings instead of another mortgage company?

3 Answers

You do have a couple of options here, but one thing that will limit them is your intent to keep this as an investment (rather than owner occupied) property. You cannot exceed 70% loan to value (at most) on an investment property refinance, and it is doubtful you could obtain a home equity line for 80% on an investment property. If you were occupying the property, you could certainly do an 80% cash out or a heloc (given adequate income and credit) to buy out your brothers. Not sure it's going to work as an investment property scenario though. Tax wise, you're best off asking a tax attorney. Your cost basis may be different once you buy out your brothers, if you get to that point. The whole key to this scenario is the non owner occupied aspect of your plan. Hope that helps! Ted

The loan to value here is too high for a home equity loan. Your best bet is to get a mortgage. The interest rate is going to be much lower and the terms will be set (no interest rate increases).

As to the tax ramifications, I am not a CPA, but for yourself, you have money going out not coming in so there is not an income tax consideration here. In fact, having 100% ownership and a mortgage will allow you to deduct 100% of the property taxes and mortgage interest.

You siblings on the other hand may need to pay capital gains if the date from the inheritance and the date of the sale is not far enough apart - though they would qualify under the $250k cap.

Maximum loan to value for cash out refinances is 85%. That's cutting it close, based on the value estimate you provided, once you set up escrows and cover closing costs. A home equity line will often go to 89.9% loan to value (or cumulative loan to value), you may well have more room to pay off your brothers by considering that option. You could certainly do a first mortgage for the bulk of the balance and a home equity line for the remainder, given adequate credit and income!