As housing prices and mortgage rates continue to escalate, many young people struggle to purchase their first home or upgrade. One option is for parents or family to finance the purchase of the house and hold a mortgage. The transaction is documented like a regular mortgage with monthly payments.

Let’s look at the advantages:

• Favorable interest rates. Per the IRS, you are required to charge a minimum interest rate to avoid tax complications. For April 2024, that rate is 4.45 % for loans with a maturity of more than nine years. The current 30-year fixed mortgage is approximately 7.125%.
• Flexible terms like a 100% loan are possible.
• Even if you have the ability to gift a home, a mortgage is asset protection. In the event of a divorce, the loan would need to be repaid. This could protect against the loss of an asset.
• At any point, you could revisit and forgive some or all of the loan. Or maybe refinance if rates drop.

For 2024, the annual gift limit is $18,000 per donee. So, if you are married, you and your spouse could gift $18,000 each to a child for a total of $36,000. If the child is married, the same gift can be made to their spouse for a total of $72,000. Any amount within a year exceeding the above limits has gift tax consequences.

For 2024, each individual has a lifetime gift and estate exemption of $13.61 million ($27.22 million per married couple). If you exceed the annual gift limit, any excess would reduce the lifetime limit.

There are a limitless number of variations on this theme. Family may want to assist with the purchase and payments but not finance the entire purchase:

• Say the parent wants to gift the down payment. The down payment is a gift subject to the gift tax limits.
• Paying part or all of the payments for a period of time would also be considered a gift.
• Structure the downpayment as a loan and forgive over time, subject to the annual gift limits.
  

One word of caution – if you are doing any of the above in conjunction with a conventional mortgage make certain you communicate with the lender and make certain any gift doesn’t create other issues.

If you’d like to discuss this further, contact your Dent Moses advisor.