Buy your children a house?

Not so fast, says an article in the WSJ, (June 22, Getting Personal: Think Twice Before Buying Your Children A Home, writer: Shelley Banjo).

The article discusses the scenario, which is fitting in the current economic situation, where the parents feel they may get a double benefit for buying their children a house: 1) moving assets out of their estate and 2) getting a great deal on a home.

The fear, the writer points out, is that if the high net worth clients have income producing assets, namely securities or a business, and if gifted instead, have a better long-term estate benefit for the folks. Therefore, asset for asset, these income producing assets make better gifts then a house on getting the maximum out of the parent's estate into the hands of the next generation.

If getting the kids into a house is the objective, the article mentions two approaches: 1) give the $13,000 per person gift allowance (between mom and dad, daughter and husband this can be up to $52,000/year). Now, no lifetime gift tax exclusion is utilized yet funds are being transferred out of the one estate to the next. The daughter can now take out a mortgage and use the $52,000 towards a home purchase, annually. The next option, 2) is to loan the daughter the funds for the house. While this doesn't move assets out of the estate, gifting the income producing assets mentioned above can provide an income stream for the child to repay the loan. The loan could even be forgiven down the road but that can be decided much later. Regardless, don't forget the current first-time home buyer credit. This makes buying the house even more affordable.

The article next mentions the QPRT. If parents want to move their primary or secondary residence to their children, this is a great option, especially for depreciating houses. More on QPRTs in another blog entry but suffice it to say that parents get to pass the house to the kids and continue to live in the home.

Great ideas.