Down Payment Gifts

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Relatives who want to help the younger generation buy a home should make sure their generosity goes unpunished by the IRS.  Here are a few ways to structure the handout:
 
 Gift Money: An individual can give up to $14,000 a year to any number of people without triggering the gift tax.
 
 A married couple can quadruple the power by each giving the allowable gift to the child and the spouse, for a grand total of $56,000.
 
 If the timing is right, the married couple could give $56,000 in December and another $56,000 in January to maximize the gift.
 
 A gift more than that amount must be reported, although taxes don’t need to be paid until the individual surpasses the lifetime limit of $1 million for gifts.
 
 At that point, a hefty gift tax — 47 percent in 2005 — is imposed on the donor. From the kid’s perspective, there’s no tax consequence.  But the parents may have to pay. 
 
 Low-interest loan: Parents commonly structure the cash as a cheap loan and, in addition, forgive a certain portion of the loan and interest each year.
 
 But keep in mind, parents owe tax on “imputed interest” if they charge less than the current market rate, called the applicable federal rate or AFR. Make sure the note is properly recorded so that a child who makes payments can deduct the interest.
 
 Often, the loan is structured so that the child’s payment and interest each year can be wiped out by the allowable annual gift. But tread carefully, tax experts say.   If the parents come up with this loan, and the child never makes payments on it, then the IRS can say ’this was really a gift in the full amount, the note is a sham.”’
 
 Joint purchase: In one scenario, a parent and child will each buy 50 percent of a house, and the child (who lives in the house) will pay rent to the parent for use of that half of the house.
 
 Tax-wise, it’s a more complicated process, as the parent becomes a real estate investor. The child, who must have adequate income, and the parent split the deductions from mortgage interest and property taxes.