This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.
Economic and tax considerations make right now a good time for parents (and grandparents) who are willing and able to help their adult children buy a home. 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 2015, taxpayers in the 10% and 15% tax brackets for regular taxable income will enjoy a 0% tax rate on long-term capital gains (LTCGs). Thus, your child won’t pay any federal income taxes on any LTCGs they realize this year to the extent his or her taxable income (including LTCGs) does not exceed $74,900 if married and filing jointly, $50,200 if head of household, or $37,450 if single. So, if the child’s income (after the standard deduction and personal exemptions) will fall in this range in 2015 and you hold appreciated stocks and mutual fund shares in taxable brokerage firm accounts, you could give him or her some shares.
The child can then sell them and use the proceeds to help finance his or her home purchase. Gains will be long term (and federally income-tax-free) if your ownership period plus his or hers 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), 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 2015 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 $5.43 million federal gift and estate tax exemption.
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 him or her. 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 loan without having to deal with the complicated below-market loan rules.
Tagged: tax tips