Mortgage interest rates are still at low levels, but they likely will increase as the Fed continues to raise rates. If you have been thinking about helping your child — or grandchild — buy a home, consider acting soon. There also are some favorable tax factors that may help:
0% capital gains rate
If the child is in the 10% or 15% income tax bracket, instead of giving cash to help fund a down payment, consider giving long-term appreciated assets such as stock or mutual fund shares. The child can sell the assets without incurring any federal income taxes on the gain, and you can save the taxes you would owe if you sold the assets yourself. State taxes may still apply.
As long as the assets are worth $14,000 or less (when combined with any other 2017 gifts to the child), there will be no federal gift tax consequences — thanks to the annual gift tax exclusion. Married couples can give twice that amount tax-free if they split the gift. And if you don’t mind using up some of your lifetime exemption ($5.49 million for 2017), you can give even more.
Low federal interest rates
Another tax-friendly option is lending funds. Currently, Applicable Federal Rates — the rates that can be charged on intrafamily loans without causing unwanted tax consequences — are still quite low by historical standards. But these rates have begun to rise and are also expected to continue to increase this year. Accordingly, lending money to a loved one for a home purchase sooner rather than later might be a good idea.
If you choose the loan option, it’s important to put a loan agreement in writing and actually collect payment (including interest) on the loan. Otherwise the IRS could deem the loan to be a taxable gift. Keep in mind that you will have to report the interest as income and that the loan recipient may be required to report the loan as debt on the mortgage application. However if the interest rate is low, the tax impact should be minimal.
If you have questions about these or other tax-efficient ways to help your child or grandchild buy a home, please contact your tax advisor.