Parents and grandparents who are considering helping their adult children buy a home might also consider the economic and tax-advantaged considerations that make right now a good time to move ahead with the plan. Some residential real estate markets are “hot” with homes selling for more than asking price. In other markets, the prices are recovering, but are still at lower levels than they were a few years ago. With mortgage interest rates at historically low levels, now may be a great time to buy a home. There are also some favorable tax factors that will help.
Beneficial Tax Factors for Helping your Adult Children Buy a Home
Two of the most potentially tax-advantaged considerations to watch out for include:
1) 0% capital gains rate. For 2015, taxpayers in the 10% and 15% tax brackets for regular taxable income will enjoy a 0% tax rate on long-term capital gains (LTCGs). This is great news for your children who are considering a home purchase as it means they won’t pay any federal income taxes on any LTCGs they realize this year to the extent that their taxable income (including LTCGs) does not exceed $74,900 if married and filing jointly, $50,200 if head of household, or $37,450 if single. So, if your child’s income (after the standard deduction and personal exemptions) will fall in this range in 2015 and you hold appreciated stocks and mutual fund shares in taxable brokerage firm accounts, you could gift him or her some shares. Your child can then sell those shares and use the proceeds to help finance his or her home purchase. Gains will be long term (and federally income-tax-free) if your ownership period plus his or hers is over a year.
As long as the stock you give your child this year is worth $14,000 or less (when combined with any other gifts you make to that same child), your taxable estate is reduced without any adverse federal gift or estate tax consequences — thanks to the annual gift tax exclusion privilege ($14,000 for 2015 gifts). Married taxpayers can double this amount by giving up to $28,000 ($56,000 if the child is married) this year without triggering adverse estate and gift tax consequences. You can give away even more than these amounts if you don’t mind dipping into your $5.43 million federal gift and estate tax exemption.
2) Low federal interest rates. If additional funds are needed for your child to purchase a home, you might want to consider loaning the additional funds to him or her. Now is a very good time for taking this step, too. With loans between family members, the Applicable Federal Rate (AFR) is a big deal. Why? Because that’s the rate the lending parent can charge without causing any unwanted tax complications. Currently, AFRs are very low by historical standards, so making a loan that charges the AFR is a great way for a parental lender to give an adult child borrower a favorable loan without having to deal with the complicated below-market loan rules.
For questions on the specific tax-advantaged considerations you’ll face if you choose to help your adult children buy a home, contact your Untracht Early advisor.