When Mom and Dad Are the Lender

By: Diya Gullapalli: REALTOR® Magazine Online
The number of first-time homebuyers who use monetary gifts from family or friends to make down payments has increased to 25 percent from 20 percent over the past 10 years. If you're thinking of doing that for your children, be aware of tax and other issues that arise.

Given that the Internal Revenue Service taxes gifts of $12,000 or more, you might want to set up an intrafamily mortgage to help your offspring achieve homeownership.

Your children benefit from below-market interest rates-though they must pay the applicable federal rate of about 4.5 percent to avoid gift taxes-flexible payment schedules, the absence of credit checks, and lower closing costs. They also still can deduct the interest from their income taxes, provided that there is a deed of trust and the mortgage is recorded with the county clerk.

While you can benefit from steady cash flow during your retirement years, avoid such arrangements if you make the loan solely as an investment. You could achieve better investment returns elsewhere, and your emergency or retirement savings might be depleted by lending the money.