Now Is The Time For Parents And Grandparents To Help Adult Children Buy Their First Home

An unusual confluence of tax conditions and reduced home prices has created an opportunity for families with some assets to help adult children – and obtain a tax break

Right now, and until Nov. 30, 2009, is one of the best possible opportunities that has ever existed for parents (and grandparents) to help their adult children make first-time home purchases while achieving their own significant tax savings, says Robin Christian, Senior Tax Analyst at the Tax & Accounting business of Thomson Reuters. “With home prices and interest rates low, this unique ‘perfect storm’ of tax factors will benefit parents and grandparents who are willing and able to help their kids with a first home purchase,” she says.

“We suspect that unless the law that enables all of the tax benefit is extended past November 30, 2009, that this exceptionally positive scenario won’t last much longer.”

Beneficial Tax Factors

First-time Home Buyer Tax Credit. As a first-time home buyer, your child or grandchild may be entitled to a tax credit of 10 percent of the home’s purchase price, up to $8,000 ($4,000, if they are married and do not file a joint return). The credit can be used to offset the child’s entire federal income tax bill, including any AMT. And since the credit is refundable, your child can collect, in cash, any amount leftover after his or her federal income tax bill has been reduced to zero. Better yet, he or she can get the refund right away (as opposed to waiting until the 2009 return is filed) by claiming the credit on the 2008 Form 1040 (or Form 1040X, if the 2008 return has already been filed).

Unless this benefit is extended by Congress, the credit is available only for home purchases completed by Nov. 30, 2009. Also, the credit is phased out (reduced or completely eliminated) if your child’s Modified Adjusted Gross Income (MAGI) is too high. The phase-out range is between MAGI of $150,000 and $170,000 for married joint filers and $75,000 and $95,000 for unmarried individuals and married individuals who file separately.

Zero Percent Capital Gains Rate. Parents/grandparents who hold appreciated securities in taxable accounts can consider giving some shares to an adult child to help finance an initial home purchase. By giving away appreciated securities, the parent/grandparent avoids capital gains taxes on the appreciation. On the adult childs’ side of the deal, they can probably take advantage of the current 0 percent federal income tax rate on long-term capital gains.

For 2009, taxpayers in the 10 percent and 15 percent tax brackets for regular taxable income will enjoy a 0 percent tax rate on long-term capital gains. This means an adult child won’t pay any federal income taxes on any long-term capital gains (they realize this year) to the extent his or her taxable income (including long-term capital gains) does not exceed $67,900 if married and filing jointly, $45,500 if head of household, or $33,95, if single. So, if the child’s income (after the standard deduction and personal exemptions) will fall in this range in 2009 and parents/grandparents hold appreciated stocks and mutual fund shares in taxable brokerage firm accounts, they could give him or her some shares. The adult children can then sell them and use the proceeds to help finance their home purchase. Gains will be long-term (and federal income tax free) if the parents’ and children’s ownership period is more than a year.

As long as the stock the parent/grandparent gives the child this year is worth $13,000 or less (when combined with any other gifts to the same child this year), that generous parent/grandparent’s taxable estate is reduced without any adverse federal gift or estate tax consequences, thanks to the annual gift tax exclusion privilege ($13,000 for 2009 gifts). Married taxpayers can double this amount — they can give up to $26,000 this year without triggering adverse estate and gift tax consequences.

Low Federal Interest Rates. If additional funds are needed for the adult child to purchase his or her first home, a parent or grandparent can consider loaning additional funds to them. “Now is a very good time for taking this step, because loans between family members qualify for Applicable Federal Rate (AFR),” says Christian. “This means the lending parent can charge this rate without causing any unwanted tax complications.”

“Right now AFRs are very low, compared with 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 deal without having to deal with the complicated below-market loan rules.”

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