Helping Family Members Pay For Housing

Though the economy is recovering gradually, many families still struggle to purchase homes or maintain home payments. In a pinch, many of these families have turned to families members for financial support, but these supporting relatives need to be wary of the potential relationship and tax consequences of giving money to loved ones in need. Not only can intrafamily loans can create tension and family feuds later on, but they can also get the giving party in trouble with the IRS. For example, gifts of cash or other assets can count against the giver’s $5.12 million gift or estate tax exclusion amount. Five strategies family members can follow to help loved ones pay for housing are below:

1. Family members can give the loved one in need $13,000 in cash. Everyone is allowed to give $13,000 each year to as many individuals as they wish, tax-free. Spouses can combine their amounts to give $26,000 to any person tax-free.
2. Family members can pay off the mortgage of a struggling loved one.
3. Family members can lend each other money at much more favorable rates than banks provide. The lending party must charge a minimum rate of interest set each month by the Treasury to avoid potential gift and income tax consequences.
4. A generous family member can use his annual exclusion and lifetime exemption amount to buy a loved one a house and then transfer partial interests in the house over time. The value of the partial interest (known as a fractional share) can be substantially discounted because it is not a controlling interest. However, a professional appraisal must be done at the time of the first transfer.
5. Family members can also offer rent-free living to those in need. As long as the fair market value of the rent falls withint the annual exclusion, a family member can allow another to live in his house rent free.

See Deborah L. Jacobs, 5 Ways to Help Family Pay For Housing, Forbes, Apr. 2, 2012.