Mortgage interest rates are still at historically low levels, but they’re expected to go up by year end. So if you’ve been thinking about helping your child — or grandchild — buy a home, consider acting soon. There also are some favorable tax factors that will help:
0% capital gains rate. If the child is in the 10% or 15% 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’d owe if you sold the assets yourself. As long as the assets are worth $14,000 or less (when combined with any other 2015 gifts to the child), there will be no federal gift tax consequences — thanks to the annual gift tax exclusion.
Low federal interest rates. Another tax-friendly option is lending funds to the child. Now is a good time for taking this step, too. Currently, Applicable Federal Rates — the rates that can be charged on intra-family loans without causing unwanted tax consequences — are very low by historical standards. But these rates are also expected to increase by year end. If you do act as the lender, it is important that a promissory note is prepared to reflect the interest rate and payment terms. The terms of the note should be respected, including regular payments of principal and interest. Failure to treat the loan in a business-like manner could result in unintended estate and income tax consequences.
Also, in order for your child to be able to claim the mortgage interest deduction for interest payments made, a mortgage secured by the residence should be recorded properly. Your title company should be able to assist with this process for a nominal fee.
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