Being a Successful Father…

… will produce a child greater than himself. Troy Vincent, the all-time football cornerback, gets credit for that statement; yet as a father myself, I can agree that as a dad, we want our children to have something better. This month we’ll celebrate dads, so I thought I’d offer something related to helping our kids when it comes to houses.

Oftentimes when it comes time for down payment assistance, parents [not just dads] provide cash. But gifts of home equity are another option to provide financial assistance by gifting any amount of equity up to their residence’s full value. The parents can remain in the home while gifting or in another scenario, the parents can downsize by moving into another home allowing the children to move into the existing home. The parents would utilize the cash resources to purchase a down-sized home.

For tax purposes, the Internal Revenue Service considers equity in the same manner it considers cash gifting, subject to the maximum allowable annual tax-exemption limits. You can give up to $14,000 a person per year; however, each parent can give to both a husband and wife, for a nontaxable sum of up to $56,000. These annual gifts are not counted toward the parents’ lifetime federal estate-tax exemption.

There are considerations for equity-gift transactions. The parents must show the IRS that they are selling at fairmarket value. In the situation where the parents retain part-ownership, it can mean two appraisals, one for the full home value and one to determine the value of the gifted portion. Keep in mind that Congress can change lifetime gift limits at any time and there are conditions in order to accomplish gifting equity:

• The entire mortgage must be paid off before a gift of equity can be made; meaning that the equity providers can’t retain a mortgage – however, there can be simultaneous transactions in eliminating a mortgage while gifting.
• Capital-gains taxes might be triggers if the sales price is $500,000 more than the parents paid to purchase it;
• Property taxes might be reassessed.

Beginning with a gift of equity can help achieve a gift free of tax when accomplished over time. It’s always smart to talk – especially to your kids. My kids are a little young to purchase a home yet, but I hope they’ll let my wife and I offer some advice when it comes time.

We lend where we live,

Michael Pattullo
MLO# 229675
Mortgage Advisor
360.607.9312
mpattullo@peakmtg.com
Peak Mortgage
Peakmtgnw.com