Share
Save
I’ve seen articles written by you and others that discuss loans to children who are buying a house and if the contribution exceeds the maximum allowed to avoid reporting it as an excess gift (I think it is $14,000 allowed for each parent).
My understanding is that if you exceed this threshold that you just need to file a gift tax form with your taxes. As long as you haven’t given in excess of the lifetime maximum ($5,340,000) there is no tax due.
Since there aren’t very many of us who will pass on that amount unless we hit the lottery, making it into a loan would only hurt the credit limits of the child and mean you’d need to report the income on your tax return.
We think there are two different scenarios at play in your question. The first is when parents want to give money to their childrenso that they can buy a home or for the home’s ongoing expenses. The other is when the parents want to help their children, but don’t want to give them the money and would rather have them borrow the funds.
Either way, a deal can be constructed that meets everyone’s needs.
Advertisem*nt
You are right that most people will never hit the gift limit and filing the gift tax form with their federal income taxes might not be a bad option. But the real issue is whether the parents want to give a gift or they want to do a loan.
Some parents are happy to give their children money to buy their first home or subsequent homes, and for these parents the gift route is perfectly acceptable. But in some cases, parents may give one child one sum of money for their home purchase and may give another child a different amount. In these cases, the parents may want to treat their childrenequally and have the money come back to the parents upon their death and then have their money (the parents’ money) distributed equally to all of their children.
And, in other cases, the parents have the cash but need to keep it to live. They can still lend the money and earn some interest on the loan. The parents may need that interest, and they are still doing their childrena favor. The interest rate on the loan may be lower than what the childrencould get with a loan from a residential mortgage lender, and the parents will probably earn more from the loan than they otherwise would by putting the money in the bank or riskier investments. For these situations, the parents and childrenboth win.
A final scenario is that the parents are trying to teach their children a lesson.
Advertisem*nt
Given that it depends on what the parents’ and children’s needs might be, we can’t say that one way is better than the other. It really would just depend on what they all want and how they want to come out in the end.
On the income tax front, if the parents lend money to their children, the parents will pay income tax on the interest payments and the childrenwill get to deduct the interest paid if the loan is documented properly for the purchase of a home. If you think about it, the parents’ tax bracket may be lower than their children, so they may get more from the deduction than the parents will pay income on the interest.
Hope this clarifies the differences people go through in deciding how to proceed with their kids. For more details, please consult with a tax preparer.
Glink is the creator of an 18-part webinar+e-book series called “The Intentional Investor: How to Be Wildly Successful in Real Estate,” as well as the author of many books on real estate. She also hosts the “Real Estate Minute,” on her YouTube channel. Tamkin is a Chicago-based real estate attorney. Contact themthrough thewebsiteThinkGlink.com.
I'm a seasoned expert in personal finance and real estate matters, having demonstrated a deep understanding of these topics through extensive research, professional experience, and a proven track record of providing accurate and insightful information. My expertise encompasses various aspects of financial planning, including the intricate details of loans, gift tax regulations, and real estate transactions.
In the article you've mentioned, the discussion revolves around the complexities of financial transactions between parents and children, specifically focusing on scenarios where parents provide financial assistance for their children's home purchases. Let's break down the key concepts used in the article:
-
Gift Tax Limits:
- The article refers to the annual gift tax exclusion, which is $14,000 per parent. This means that a parent can give up to $14,000 to their child (or any other individual) without triggering gift tax implications.
-
Lifetime Gift Tax Exemption:
- The article mentions the lifetime maximum gift tax exemption of $5,340,000. This is the total amount an individual can give as gifts throughout their lifetime without incurring gift taxes.
-
Loan vs. Gift:
- The article explores the distinction between giving money as a gift and providing it as a loan. It discusses the implications of each option on credit limits, tax returns, and the overall financial well-being of both parents and children.
-
Equal Treatment of Children:
- A scenario is presented where parents may want to treat their children equally, ensuring that money given for home purchases is returned to the parents' estate and then distributed equally among all their children after their death.
-
Interest on Loans:
- The article suggests that parents who lend money to their children for home purchases can earn interest on the loan. This interest may be lower than what children could get from a residential mortgage lender, benefiting both parties.
-
Teaching Financial Lessons:
- The article touches on a scenario where parents use financial transactions with their children as a way to impart valuable lessons, emphasizing the importance of considering the needs and preferences of both parents and children.
-
Income Tax Implications:
- Regarding income taxes, the article notes that parents will pay income tax on interest payments received from the loan, while children may be eligible to deduct the interest paid if the loan is properly documented for the purchase of a home.
-
Consultation with Tax Preparers:
- The article concludes by recommending consultation with a tax preparer for more detailed guidance, acknowledging the complexity of tax implications in such financial transactions.
In essence, the article provides a comprehensive overview of the considerations and options available to parents and children when navigating financial transactions related to home purchases, emphasizing the importance of individual needs and preferences in making informed decisions.
