Smart Tax Tactic for Estate Planning: Gift a Home Down Payment

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With the housing market beginning to stabilize in many areas, now is a tantalizing time for many first-time homebuyers to act. That a 30-year, fixed-rate mortgage can be had for 4 percent is incredibly good. But there’s a catch. Most lenders are looking for down payments of 10 or 20 percent to make a deal. Or they might take a sub-20 percent down payment, but only at a higher interest rate. And to state the obvious, coming up with the down payment isn’t exactly pocket change for first-time homebuyers and 20-somethings.

That’s where a parental (or grandparental) gift can be a ticket to helping a grown child. It’s also got to be a tad bit more satisfying to put some extra cash to work for your family than watch it earn a measly 1 percent or so in a bank account these days.

You can, of course, give any amount of money to anyone, for any reason. But giving a gift of more than $13,000 to any one individual means you will be required to file a gift tax form with the IRS. No tax is due during your lifetime, but you still must file IRS Form 709.

To be honest, chances are there will never be any tax impact. When you pass, your estate will be required to toss in the amount of financial gifts that exceeded the annual exclusion into the computation of your federal estate tax. Right now the federal gift tax and estate tax exemption for 2012 is a mighty high $5.12 million (per individual). But who knows what Congress might decide to do with the gift tax and estate tax exemptions for 2013 and beyond. (And just keep in mind that as recently as 2010 the lifetime gift tax exclusion was a far lower $1 million.) Moreover, some states impose their own estate taxes that are much less generous than the federal limit.

Working around the Federal limit

You can circumvent having to think hard about any of this by limiting individual gifts to $13,000 a year. (If you want to make larger gifts, you should be working out a comprehensive tax-smart giving plan with a sharp attorney anyways.)

But there are plenty of ways to give more than $13K to a child and sidestep the tax paperwork. For starters, if you are married, your spouse can gift the same $13K to that child. So right off the bat you can contribute $26K for a down payment. And if said child has a partner or spouse, you can both make the same gifts to that individual. So now you’re up to a generous $52K in gifts without having to send in any paperwork to the IRS, or reducing your lifetime federal gift and estate tax exemptions. Even better, you’ve reduced the size of your taxable estate.

Also, if you’re going to gift the down payment, you’ll eventually need to put in writing that the money is indeed a gift, and not in any way a loan. Otherwise your kid’s mortgage lender is going to count that money as more debt in the qualifying process.

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Carla Fried

Carla Fried is a freelance journalist who has covered just about every nook and cranny of personal finance for media including Money Magazine, The New York Times, and CBS MoneyWatch.com. Prior to launching her own reporting and writing business in 2002 she was a senior writer at Money and the managing editor of Quicken.com.

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