Six Ways To Help Buy A Home

Buying that first home is one of the things that makes a person believe he or she is on the path to success and security. For today’s young people, buying that first home can be hard. In many areas, real estate prices continue to climb, and most young people graduate from college owing student loans. Grandparents and parents can help a youngster buy that first home, and the tax code can make providing that help much easier. Here are a few strategies to consider.

Make a gift of the down payment. This is the easiest solution and deals with the toughest problem most young people have: coming up with the initial down payment.

Under the gift tax rules, you can give tax free up to $10,000 annually to each person. You and your spouse can give jointly $20,000 per person. If the young person you want to help is married, you can give $20,000 to each spouse for a total tax-free gift of $40,000.

You can tell the grandchild this is an early inheritance. You might find it is better for them to get some money now rather than a possibly larger amount some years later. Of course, to use this strategy, you have to be able to maintain your standard of living without the money.

Buy the house yourself. Sometimes in addition to lacking a down payment, the young person doesn’t have enough of a credit history to get a loan. Or the credit history is bad. You can buy the house then either rent to the grandchild with an option to buy or make an immediate sale to the grandchild without requiring a down payment.

You’ll want to have regular contracts drawn up and have any mortgage recorded as in a standard real estate transaction. In time, the grandchild might want to refinance with an independent bank or mortgage company to establish a stronger credit rating.

This arrangement gets the young person is the habit of making regular payments and treating the home as his own. It also gives you some options if things don’t work out. You own the home, so you can rent it to someone else. Or you can sell it. If homes in your area appreciate, you could make a profit if the grandchild is unable to keep up with the financial responsibility.

You could lose some money, but this is the strategy that is most likely to make you whole if things go wrong. But you want to be confident that you can continue to make the payments yourself in case the grandchild becomes unemployed or just cannot handle the responsibility of making the payments.

Make a low-interest loan. Suppose you can afford to let the grandchild use some money now, but in the future you anticipate needing the money to maintain your standard of living. In that case, you can make a no-interest or low-interest loan. You expect to be paid back. But the grandchild has the advantage of getting the use of the money without paying interest. Your only loss if the money is repaid is the income and gains the money could have earned.

Low-interest loans have no tax consequences if you stay within the safe harbors. There are no tax consequences when the total loans to an individual do not exceed $10,000. Another exception applies to gift loans between individuals that total less than $100,000. With these loans, there are no tax consequences if the borrower has net annual investment income of $1,000 or less. If the investment income is higher, then there will be imputed interest payments between borrower and lender to the extent net investment income exceeds $1,000.

If you don’t qualify for a safe harbor, then a market interest rate will be imputed to the loan. You’ll be treated as though interest payments were made. The borrower might get deductions for interest payments that weren’t made, but you’ll be taxed on interest income you won’t receive. Check with a tax advisor and be sure you qualify for one of the safe harbors before making a low interest loan.

Try equity sharing. In the inflationary 1970s and 1980s, equity sharing deals were popular, especially in California. In these deals, two people jointly purchase equal shares of a home. One person usually puts up the down payment and does not live there. The other person lives in the home and pays rent to the investor-owner equal to half the rental value. They pay equal shares of the mortgage and other expenses. You’ll need a real estate lawyer to meet all the tax requirements and get the contracts right. These deals are less popular now that inflation isn’t pushing up home prices as quickly as it did 20 years ago.

Help pay the mortgage. You can make annual gifts to the grandchild to help pay all or part of the mortgage. The same gift rules as discussed earlier apply. The advantage here is that the grandchild obtains the mortgage from an independent lender on his or her own and establishes a clear credit rating. Of course, you’ll want to fully discuss the consequences if something were to happen to you or your financial position that might make future gifts unlikely.

Leverage your credit sources. You probably can borrow relatively cheaply against your home equity or your investments. You can take out a margin loan or home equity loan and lend the proceeds to the young person, charging the same interest rate you pay. The advantage is that the young person might be able to borrow at a rate lower than he or she independently would get. You can have the loan secured by the home. The disadvantage to is that you are on the hook for the loan against your home or portfolio. If you have secured the loan against the grandchild’s home, the damage might be slight. But you want to be sure you can afford the loss.