Even as home prices and mortgage rates are exceptionally low, most of today’s young adults cannot own a home due to tighten lending standards.
With these tighten lending standards, parents of today’s young adults can act as their children’s mortgage lenders.
The National Association of Realtors reported that in 2011 alone, one in three first-time buyers received either a loan or gift from their families to help buy a home.
Late last year, result of a national survey commissioned by Better Homes and Gardens Real Estate shows that one in five baby boomers have gifted, loaned or co-signed a loan to support their children or grandchildren in purchasing a home. The survey result also shows that two-thirds of baby boomers want to provide this type of support to children or grandchildren in the future.
Janice Revell of Fortune Magazine wrote, “Such a move (loaning or gifting) can provide significant financial benefits to child and parent alike. But you need to proceed carefully to maximize the tax and estate-planning advantages and avoid unpleasant family conflicts.”
There are two ways a parent can help in buying a home: giving outright cash or lending money.
For 2012, a taxpayer can give $13,000 to an individual without paying a gift tax. A married couple, therefore, can outrightly give $26,000 to their child without tax hassle.
Other than giving outright cash, you can opt to lend money to your child. For tax purposes, you are considered a lender if you charge interest. As of January 2012, interest rates ranged from 0.19% for loan terms of three years or less to 2.63% for loan maturities of over nine years.
Carol Kroch, head of wealth planning at Wilmington Trust, told Fortune Magazine that you can even forgive part of the loan’s principal each year, using the $13,000 annual gift tax exclusion.
Revell wrote, “Experts stress the importance of drawing up a formal promissory note that spells out the terms. If the loan is properly structured as a mortgage and filed, the interest will be tax-deductible for your child. Having a contract also makes estate planning easier. The last thing you want to leave behind is a family squabble over a well-intentioned loan.”
Whether you are a first time buyer, first time seller, empty nester, thinking about selling or buying a home, do contact the Guldi Real Estate Group. In Southern Maryland, the Guldi Real Estate Group is the number one real estate team.