The tightened lending standards are keeping a lot of young professionals on the sidelines in home buying today. That’s where more parents are stepping in.
.
More parents are taking on the role as mortgage lenders to help their kids take advantage of low home prices and record-low mortgage rates. In fact, one in three first-time home buyers either received a gift or loan from their families for a home purchase made in 2011, according to National Association of REALTORS®’ research.
But parents who enter into a gift-giver or mortgage lender role need to make sure they follow some tax guidelines.
For one, the federal government has rules on how much you’re allowed to gift. For 2012, individuals can give up to $13,000 per one person tax free in one year without having to pay gift taxes. Married couples can give up to $26,000 a year or $52,000 per young couple ($26,000 for the child and $26,000 for their spouse) - check with your tax accountant for details.
.
Some parents, instead of providing a gift, are acting more as a mortgage lender.
Parents can set up an arrangement where they charge interest on the money they lend, but the interest charged must be based on the IRS’s “applicable federal rate” minimum for various loan maturities. Still, those rates are even far below today’s record-low mortgage rates (anywhere from 0.19% or even less for three-year loan terms to 2.63% for nine-year loan terms) – check with your tax accountant for details.
Parents will need to pay income taxes on any interest earned on the loans. Still, the return may be better than what they can get for a low-interest CD or money market fund nowadays. As for the children, they’ll still be able to deduct the interest on their taxes for the mortgage interest deduction if these agreements are formally structured.
.
More about Parent Financing: Become Your Kid’s Mortgage Lender
NOTE: I am a REALTOR, not a tax accountant. For TAX advice always contact a CPA Accountant.
SOURCE: Fortune
