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Best Way To Help Son Buy?

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Posted On: 09/24/2014

Question: My wife and I want to help our son and his wife purchase their first home. We're not sure what's the best way to go. We can provide $50,000 for a down payment, but what about the tax implications? Would it be better for us to invest in the property?

Answer: According to the IRS the annual tax exclusion for gifts is $14,000 for 2014. That means you can give your son $14,000 and another $14,000 for your daughter-in-law. Your wife can do the same, meaning you and your wife can give your son and his wife as much as $56,000 tax-free in 2014. For details and specifics speak with a tax professional.

If your son and his wife buy property with a mortgage, the lender will want to know about the source of their funds. The lender will have you provide a "gift letter" showing that the money given to your son and his wife is a gift and that you do not expect repayment.

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As to holding an interest in the property as an investment, that's a different story. Under the Black Lung Benefits Revenue Act of 1981 you might want to consider buying jointly with your son and his wife by using an "equity-sharing" arrangement.

In basic terms, an equity-sharing agreement allows your son and his wife to be resident equity owners while you and your wife are nonresident investors. Your son and his wife can deduct a portion of the mortgage interest and property taxes, while you and your wife can deduct a portion as investors. Because you are "investors" and not residents you can also depreciate your share of the property.

As an example, you put up $50,000, and a property worth $300,000 is purchased. You and your wife have a 30-percent interest in the property - a number that entirely is negotiable - and your son and his wife own 70 percent. Each month they pay you rent equal to 30 percent of the fair market rental for the property.

Equity-sharing arrangements raise a number of questions: What if you want to sell and your son doesn't? What if there's a family fight? Or a divorce? What happens if you die and leave your interest to someone other than your son? If the property is sold do you get back the full $50,000 or just 30 percent of the sale price?

Equity sharing is complex. You'll need to get advice from an attorney, and you'll also need to consider related tax and estate issues so speak with a tax professional. Meanwhile, your son and his wife should understand that they're lucky to have parents who have the financial capacity to be helpful and are willing to assist their children. In an economy where young people are having a tough time you should be proud of what you want to do.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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