Allan Rolnick, CPA
Generations ago, you only saw into your neighbor’s home if they invited you in for apple pie and dessert. Or maybe you were able to catch a glimpse of their den if they left their shades open after dark. But Zillow has changed all that. Now, you can tour the fanciest home on your block without ever knocking on the door. Still, while Zillow.com has made it easier to see if your neighbors have carpet or parquet in their living room, it’s left a big heaping helping of envy. What else would you feel after seeing that, say, British billionaire Bernie Ecclestone’s 23-year-old daughter Petra paid $85 million for a 123-room mansion in LA’s Holmby Hills neighborhood? It’s hard enough to see someone your own age scoring a crib like that. It’s even more envy-inducing when you realize she bought it before she was old enough to rent a car! Buying a home has gotten more and more challenging as both prices and interest rates move up. That means more and more parents are looking for ways to help their children accomplish that goal. Naturally, taxes play a part. If you can’t drop $85 million for your daughter’s house, you could give her money for a down payment on something more modest. However, gifts of more than a $17,000 annual exclusion count towards your lifetime unified credit for gift and estate taxes. You won’t actually pay any tax until your lifetime gifts above that $17,000/year top that unified credit (currently $12,920,000). If you’re married, you and your spouse can give $17,000 each. And if your daughter is married, you can do the same for your amazing son-in-law, bringing your total annual gift to $68,000.
Do it fast because there aren’t many places left where she can buy a home with $68,000 down! (Gen Zers: if you’d spend less on avocado toast and more on researching particle physics, maybe you could buy a time machine and go back to 1974 to buy a house?) If your pockets are deeper, consider “being the bank” for the whole house. As long as you follow proper legal formalities, your daughter can write off interest on up to $750,000 of debt, just like she would with a commercial lender. You’ll have to charge interest at least equal to the applicable federal rate, or any difference will be treated as a gift. But, that rate will generally be lower than anything they could get at a bank—it’s currently under 5%. It also avoids underwriting headaches. (There really is no such thing as a “rocket” mortgage.) You can even choose to waive that interest, up to the same annual dollar limits we just discussed, with no estate tax consequence. Another option would be to buy a house yourself to lease to your daughter. You’ll get to deduct the same operating expenses you would with any other rental property. However, this strategy means the home’s growing equity accrues to you (and winds up in your taxable estate) rather than your child. If that’s an issue, consider establishing an irrevocable trust to buy the house and let her live there. Tax planning doesn’t always involve complicated spreadsheets or government forms. Sometimes, it just means understanding tax-smart ways to make ordinary financial decisions. Buying a home is one of the most important decisions your daughter will make, and seeing the smile on her face when she takes the key will be far more rewarding than putting money into a year-end truck purchase or SEP contribution!
Allan J Rolnick is a CPA who has been in practice for over 30 years in Queens, NY. He welcomes your comments and can be reached at 718-896-8715 or at firstname.lastname@example.org.