Please note the information below is intended to provide generalized information that is appropriate in certain situations.  It is not intended or written to be used, and it cannot be used by the receipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer.  The contents of the information provided below should not be acted upon without specific professional guidance.  Please call us if you have any questions.

Economic and tax considerations make right now a good time for parents (and grandparents) who are willing and able to help their adult children make home purchases. 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 a few years ago. With mortgage interest rates at historically low levels, now may be a great time to buy a home. In addition, there are some favorable tax factors that will help. How long this good scenario will last is anyone’s guess, but we would bet not too much longer.

Beneficial Tax Factors

0% Capital Gains Rate. For 2014, taxpayers in the 10% and 15% tax brackets for regular taxable income will enjoy a 0% tax rate on long-term capital gains. Thus, your 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 $73,800 if married and file jointly, $49,400 if head of household, or $39,600 if single. So, if the child’s income (after the standard deduction and personal exemptions) will fall in this range in 2014 and you hold appreciated stocks and mutual fund shares in taxable brokerage firm accounts, you could give him or her some shares. They can then sell them and use the proceeds to help finance their home purchase. Gains will be long-term (and federally income tax free) if your ownership period plus their’s 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 to the same child this year), 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 2014 gifts). Married taxpayers can double this amount—they can give 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 $5.34 million federal gift and estate tax exclusion.

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 them. 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 deal without having to deal with the complicated below-market loan rules.

Please give us a call if you would like more information on capitalizing on today’s ultra-favorable tax factors to help your child (or grandchild) purchase a home.