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Home Ownership
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downpayment on a home

If a parent contributes to the downpayment on a home, is it better for them to gift it or to provide it as a loan to the young couple? Assuming that this would be their first major gift (definitely less that 5 m).

Zip Code: 02467

Re: downpayment on a home

This question is actually more of a question for your parents and their advisers. That being said, here are some basics:

1. A gift from one person to another is not tax deductible to the person who makes the gift and is not taxable to the person who receives the gift. That's because gifts are tied in with the Estate (Inheritance) tax system and not the income tax system.

When a person dies, the first $5 million of wealth for the decedent is exempt from Estate taxes. Ff a person makes gift in excess of a certain annual threshold (currently $14k) during their lifetime, those gifts need to be reported on a Form 709, and those reported gifts reduce the $5 million of wealth that a person's heirs can shield from Estate taxes.

Currently, a person can gift another person $14k in a calendar year before needing to report the gift on the Form 709. A married couple can gift a person $28k, and a married couple can gift another married couple $56k


2. The second rule applies to a loan being made from one person to another. For the transaction to be considered a true loan, you need to make sure there is a written loan agreement signed. The interest rate needs to be at least the stated Applicable Federal Rate (AFR) at the time the loan is disbursed. Each month, the IRS updates the AFR on www.irs.gov. There should also be a regular payment schedule set up that you abide with.

Your parents can forgive the interest each year, and can also forgive some of the principal to take full advantage of the %14k per person gift limit. However, if the rate is below the AFR, your parents will be making you a gift of the below fair market rate interest.

Finally, for you to deduct the interest that you pay, the loan has to be “attached to your deed” just like any other mortgage note. A real estate lawyer can help you with this. Otherwise, the interest won’t be deductible to you, even though it would be taxable to your parents.



I hope this helps shed some light on this topic. As I indicated above, there is no easy answer to this question, and depending on your parents' financial situation, and the financial situation of you and your siblings, there should be a well thought out plan put in place for you to help you out with the purchase of a home, as well as potentially help out your siblings too.

Please feel free to post a follow up question to my response.

Zip Code: 01801