Many young professionals have found themselves being constantly frustrated in their efforts to get on the property ladder and buy their first home. As a result, we’re seeing more cases of parents stepping in to help them out.
There’s been a big increase in the number of parents who have taken on the role of 'parent mortgage lenders', in order to help their kids buy a home while they can take advantage of historic low interest rates and prices. Parental help has become so commonplace, reports CNN Money, that almost a third of first-time buyers in 2011 received financial assistance from their families in the form of quick payday loans online or even a gift.
For this reason, it’s important that parents thinking about helping their kids out realize that there are tax implications, and so guidelines must be followed.
Where taxation is concerned, there are federal rules about how much parents are allowed to give their kids as a gift. Current guidelines state that parents are only allowed to give up to $13,000 a year, tax free. For married couples, this amount is doubled to $26,000 a year. Should the gift exceed the proscribed amount, parents will be liable to pay gift taxes. Check with a certified accountant to decide whether or not you owe taxes on your monetary gifts.
Rather than give money away for nothing, many parents are instead choosing to act as a mortgage lender for their kids. It’s possible to set up an arrangement, whereby the parents can charge interest on the amount loaned. Still, parents have to abide by the IRS’s “applicable federal rate” minimum interest rates. The good news is that this minimum rate is far lower than the average mortgage rates of today, ranging from 0.19% or even lower for a loan of three years, up to 2.63% for a nine year loan period.
Parents are also responsible for paying income tax on the interest that they earn from their kid’s loans. Usually though, the return is still much better than what they would receive for a money market fund or a low-interest CD these days. And so long as the loan agreement is structured formally, the kids will still be allowed to deduct the interest paid on their taxes for their mortgage interest deduction.