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Through home ownership your loved ones
receive a number of benefits. They are provided the security of fixed
housing costs for the future. Generally, home ownership is regarded as a
hedge against inflation, providing a way to increase equity and financial
worth. Additionally, real estate taxes and the interest paid on the
mortgage can add up to substantial income tax savings particularly for the
first time home buyers or those that have not owned a home for at least
three years. Indeed, proper utilization of a special tax program can have
the effect of reducing housing costs considerably below that of paying
rent. Current interest rates are still considerably lower than they have
been for many years. Consequently, the timing remains excellent for
parents who would like to help their children take advantage of the
opportunity. Help can be provided in several ways.
Probably the most popular of these ways,
is the gift of funds for all or part of the down payment and/or closing
costs. Both FHA and VA permit parental gifts in any amount for this
purpose. Conventional loans differ somewhat. The Internal Revenue Service
allows each parent to give up to $10,000 to each child and an additional
$10,000 to each child’s spouse, in any given year, without any tax
consequences. Of course, more often than not, the needed gift funds are
considerably less than that amount. Extremely nice homes are available for
total cash requirements of less than $5,000. When gift funds are utilized,
the lender requires the donor to sign a standard form gift letter stating
that the funds do not need to repaid. Also, the lender will require
verification that the funds provided were not borrowed. While all this may
sound complicated it really is quite easily accomplished. Your know-ledgeable
lender or experienced real estate professional uses this method on a
regular basis.
Another method is that of equity
sharing in which the parents and children purchase the home together. Even
though most or all of the initial funds are provided by the parents, the
children and parents are co-owners. Generally the children are responsible
for making the payments on the loan and other expenses just as they would
on any principal residence for themselves. For the parents the home
becomes an investment with the potential for shared capital gains and/or
tax benefits. Eventually when the home is sold the parents may be
responsible for payment of taxes on any capital gains they may have
realized, and the children can repurchase another home without having to
pay on the gains as long as certain tax criteria are met. Your
professional tax advisor can explain the tax ramifications of this
scenario.
While the above described ways are most
often utilized by parents wishing to help the children, or by children
wishing to help parents, there are other ways as well.
In the event that you may wish to help
your loved ones enjoy the benefits of home ownership, keep in mind that
the interest rates of today may be short lived. It would probably be wise
to contact a real estate professional today. I’ll bet that you’ll be
glad you did. Of course if that real estate professional happens to be the
author of this article, I’ll be glad you did as well.
The author: Hal Schupp, CRS, GRI,
Designated Broker for Vail Realty
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