Make an intrafamily loan
For many parents, gifting the money (or property) outright is not the best course of action, whether due to complicated family dynamics or because such a gift would push them over the lifetime gift and estate tax exemption.
At the same time, a traditional mortgage may be undesirable or inaccessible for their child due to high interest rates or a checkered credit history.
In such cases, an intrafamily loan can be a great choice.
For one, you can typically charge your child a lower interest rate than the prevailing market-based mortgage rate.
Second, your child won’t have transfer tax liability on any income the asset earns above the interest rate you charge, allowing them to fully benefit from any appreciation in the home’s value.
Just be aware that the IRS requires any loan between family members to be made with a
- signed written agreement,
- a fixed repayment schedule, and
- a minimum interest rate.
- If your loan is considered “below market,” the IRS will count the difference in interest against your annual or lifetime gift and estate tax exemption.
- And if the loan exceeds $10,000, you’ll need to report the interest income on your taxes.
Finally, if your child fails to repay the loan and you decide to forgive the debt, the unpaid balance will be treated as a gift for tax purposes and your child may owe income taxes on the remaining unpaid interest.