Spring 2006

A recent survey conducted by the National Association of Realtors indicated that roughly 25% of young homebuyers have family help in making that down payment on their first house. Given that the median starter home in this country is now averaging $150,000, that’s no surprise. Another element motivating family help is that reaching the 20% down payment threshold can often lower the interest rate or sidestep a mortgage insurance cost. So if the reality is that many of us as parents are going to assist a child with a first home purchase, how should it be done?

Outright Gift

A direct gift to the child is the simplest way to assist with that home down payment. But the gift tax system may be a barrier. For 2006, each parent can transfer up to $12,000 to a child without gift tax reporting. And if that child is married, the gift exemption extends to the child’s spouse. With two parents and a married child, this would allow up to $48,000 per year without gift tax return filing. But even if the annual exclusion amount is exceeded, excess gifts do not immediately cause tax, but rather consume part of the donor’s eventual estate tax exemption. Up to $1 million of today’s $2 million estate exemption can be utilized by lifetime gifts. But there are practical barriers to gifts. Can the parent afford to make a gift in view of uncertain retirement income needs? And what about that issue of fairness with other children?

The Loan Route

Because of these concerns, most parents assist that first-time homebuyer with a private loan. But that gets us into more formalities and tax issues. There should be a written note instrument that specifies an interest rate and payment frequency. A lender and borrower can structure the loan as they wish, although the IRS does impose a minimum interest rate. If a family loan is lower than the IRS stated rate, there is an assumption of an imputed gift.

If you have questions concerning the issues discussed here or any other tax-related questions, please call us at (610) 667-6250 and ask to speak to one of our Tax Specialists