Young families wanting to take advantage of the First-Time Homebuyers Credit face a challenge: the down payment. Mom and dad can come to the rescue and lend the money, co-sign the loan, or own the home jointly with their son or daughter. Let's review the options and the consequences.
The worst option, in my opinion, is owning the home jointly with your child. The home must be a principle residence to qualify for the credit and owning the home jointly will not work in many cases. Worse, when the home is sold, your child gets a section 122 exclusion of the gain; you, as the joint owner, get a capital gain tax bill. In the future I may go into a detailed analysis of this situation.
Under new banking regulations and tighter lending standards, co-signing a loan may not be enough. A down payment will be required. You can gift the money to your child, but if you have more than one child and want to distribute the wealth equally, the well may not be deep enough for you to give an equal amount to each child. All that remains is a loan of the down payment.
Lending money to family can be tricky. The IRS says you can make an interest-free loan to your child (anyone for that matter) if:
1.) The amount is under $10,000, or
2.) Up to $100,000 if the person's investment income is less than $1,000.
If you lend over these amount you must charge at least the federal rate (AFR), which is:
.78% for a loan of three years or less,
2.5% for a loan over three years and under nine years, or
3.4% for a loan term in excess of nine years.
The AFR rates are low at this time and home price are about as good as they'll ever get. Kick in the First-Time Homebuyers Credit, and now may be the ideal time to help the kids begin their lives as homeowners.