Many parents would like to give their adult children a head start in life and help them buy their first home. There are a few ways to do so that avoid gift tax consequences and some of them also provide tax deductions. Here are some ways parents can help their adult children realize the dream of home ownership.
Instructions
1. Buy the home and rent it to the child. Every year the parents can gift a portion of the equity to the child. Under current law, the maximum gift is $12,000 from each parent. Together, the parents can gift $24,000 per year to the child. If the child is married, parents can gift the same amount to the spouse, for a total of $48,000 each year. Parents pay income tax on the rental income, but, as landlords, they can also deduct property tax payments, any maintenance and repairs they pay, depreciation expense on the property and mortgage interest they pay, if they take out a loan for the purchase. Consult a CPA or an attorney for the transfer of ownership through gifting and proportionate deductions.
2. Loan the child the money to buy the home. The interest could be more than parents could get on other investment of the money, yet lower than the child would pay to a lending institution. Parents could gift equity each year in this situation, also, but it becomes more complicated. Consult a CPA for the most efficient tax strategy. Parents pay income taxes on the interest income they receive, just as they would on other investments, and the child gets a tax deduction for the interest paid.
3. Enter into a shared-equity arrangement with the child and buy the property together. For example, the parents could own 50 percent of the property and the child would own the other half. Consult an attorney on hold title in this case. Parents and the child take their proportionate share of property tax, maintenance, repair and mortgage interest deductions. The child pays the parents rent on the portion they own. Parents pay income tax on the rental income, minus the deductions. Parents also get a depreciation deduction on their rented portion of the property. One advantage to this arrangement is that lenders will class this as a residential loan with lower interest rates rather than as rental property the parents don't occupy.
4. Draft a written agreement that spells out the terms of the arrangement you and your child agree to. Draft a loan document if you lend the child money to buy the house. Consult an attorney for the wording of the documents, and have them notarized.
Tags: Consult attorney, parents gift, Parents income, child money, child would, each year, income rental
