Helping an Adult Child Buy a First Home

Economic and tax considerations make right now a super-favorable time for parents (and grandparents) who are willing and able to help their adult children make first-time home purchases. Home prices are low, interest rates are low, and the tax factors are almost unbelievably beneficial. How long this ultra-good scenario will last is anyone’s guess, but we would bet not too 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% 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. Furthermore, since the credit is refundable, your child can collect in cash any amount leftover after his or her federal income tax bill 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).

However, unless this benefit is extended by Congress, the credit is available only for home purchases completed by November 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.

0% Capital Gains Rate. For 2009, 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 $67,900 if married and file jointly, $45,500 if head of household, or $33,950 if single. So, if the child’s income (after the standard deduction and personal exemptions) will fall in this range in 2009 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 $13,000 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 ($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 your child to purchase his or her first 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. Right now 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.