Give a Home for the Holidays

Tired of the offerings at the mall? Consider giving your children something grander, like the gift of a down payment to buy a home—or even a home itself. Uncle Sam encourages such generosity.
By: JUNE FLETCHER: WSJ.com
'Tis the season of giving. But if you're tired of the offerings at the mall, why not consider giving your children something grander, like the gift of a down payment to buy a home—or even a home itself?

Uncle Sam encourages such generosity, at least within limits (the IRS site has details). You and your spouse are each allowed to give gifts of $13,000 of money or property to as many people as you want, without triggering taxes for you or the recipients. If you give more than this amount to any one person, the excess counts, dollar for dollar, against your $1 million lifetime gift-tax exclusion ($2 million for married couples).

So if you and your spouse wanted to give $50,000 to your son for a down payment on a house, together you could gift him $26,000 this year, and $24,000 next year, tax-free.

This gift could help him qualify to buy a home before the federal government's tax credit stimulus expires early next summer. If the gift allows him to make a down payment of 20% or more of the sales price, he'd also avoid having to pay private mortgage insurance.

Or, if you are interested in selling your home to your child, you could gift some of the equity in the home rather than cash. Lenders usually will accept such a gift, but may require two appraisals to make sure that the home is really worth the sales price, and will ask you to sign an affidavit affirming that you are giving a gift and don't expect repayment.

Alternatively, you could finance your deposit-poor child's second mortgage. Then you and your spouse could each give $13,000 to your child, and an equivalent amount to the child's spouse, until the loan is paid off. Or you could transfer a percentage of interest in the property each year, up to $13,000 per person, until the property belongs to your child.

It may make sense to give more than the tax-free limit each year if you think you'll be subject to the estate tax, which kicks in for those worth more than $3.5 million when you die (or $7 million for married couples), according to San Diego certified public accountant Michael Fitzsimmons. That's because if you live more than three years after the date of the gift, any appreciation on the property, plus the original value of the gift, escapes estate taxes.

What if you want to gift a property that has decreased in value since you purchased it? Not so uncommon in these post-bubble times. If you own a rental property that has dropped in value, Mr. Fitzsimmons says that it's better to sell it and take a tax loss than to gift it, since neither a donor nor a recipient can deduct a tax loss on a decrease in value that happened before the date of the gift. Losses on primary and vacation homes are non-deductible.

And what if the mortgage on the property exceeds the home's current value? It's possible to give such a property away, but according to Jenkintown, Pa., certified public accountant Michael Solomon, most lenders wouldn't allow ownership to be transferred unless the recipient was in as good or better financial shape than the donor—and might also require that the donor remain on the mortgage. Meanwhile, if you're asked to take on a home that's underwater, remember that you can't return it if it doesn't fit your lifestyle. "Declining the gift does make sense," says Mr. Solomon.