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On money

How parents can help kids get out of the nest

By HELEN HUNTLEY
Published May 25, 2003

Rising housing prices are great for those of us who are already homeowners and get to watch our houses appreciate. But for young people hoping to buy a first home, they are quite another matter.

Sometimes the only thing making home ownership possible is the largesse of Mom, Dad or a kindly grandparent. Sometimes it's a government program that fills the gap. Sometimes it takes both.

If you are thinking about helping someone else buy a home, both of you should attend a workshop for first-time homeowners. These are sponsored by government and nonprofit agencies, banks and other mortgage lenders. You can learn about the help available and about cleaning up credit problems and qualifying for mortgages.

A cash gift toward the down payment is the most common way parents help out. This makes sense if the gift is relatively small and the child can otherwise qualify for a mortgage.

Rather than making an outright gift, some parents opt for co-ownership, which the IRS calls shared equity financing. This gives the child half the income-tax benefits of full ownership plus homestead exemption. Regular ontime payments will help the child's credit rating, and the parent's equity interest will be protected. Assuming the parent does not live in the house, his or her half interest will be treated as rental property.

One drawback is that the parent's co-ownership may make the child ineligible for government assistance. In addition, both the child's and the parent's credit will be damaged if payments are not made on time. However, co-ownership is far preferable to co-signing a mortgage without having your name on the title.

The writer of the next letter took a different approach to help her daughter.

Q. Because my daughter had no credit of her own, I purchased a house for her to live in after her divorce. She made the down payment and has paid the monthly mortgage. My name alone is on the mortgage and deed. When I received a statement of taxes and interest paid, I used it as a deduction on my income tax return. I gave the tax refund to my daughter since it was really hers, but it has been nagging at me whether I did the right thing. Was I correct in taking this deduction? If not, what can I do? I expect it will be another year before my daughter can establish credit and get a mortgage. How do I transfer the house to her then?

The IRS would not approve. You own the house and you are obligated to make the mortgage payments. Regardless of your ultimate intentions, the reality is that you are renting this house to your daughter for the amount of the mortgage payments, which I suspect are probably in the ballpark of fair market rent. That means you should report her payments on your tax return as rental income to you, offset by your expenses, including mortgage interest, real estate taxes, repairs, insurance and depreciation.

The deductions you claimed probably will not raise a red flag at the IRS. But if your return were audited, a smart auditor would ask about the property's use, looking for unreported rental income. If you want to come clean, file an amended return.

Your situation also raises potential gift tax issues, since any gift of more than $11,000 to one person in a year requires the filing of a gift tax return, even though no gift tax will be due.

When your daughter is ready to get her own mortgage, contact a title company to handle the transfer of the property and the mortgage payoff. Do not take your name off the title as long as you are obligated on the mortgage.

Q. Is it possible for someone who owns savings bonds to pay the tax on the deferred interest without converting them to cash?

Yes, it is, but I don't recommend it. If you decide to switch to annual reporting, that first year you must pay the entire tax on all the accrued interest to date on all your savings bonds. After that you pay tax only on the amount of interest earned each year. To change back to tax deferral from annual reporting requires filling out a form.

The problem is that this is a major record-keeping challenge. When the bonds are redeemed, you or whoever cashes them will get a 1099 form for the interest earned, without any notation that you have already paid taxes on all or some of it. If you die owning savings bonds and you have not kept good records, your heirs might pay the tax on the interest all over again.

- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified May 25, 2003, 01:30:37]


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