Parents provide the leg up

Question: My wife and I are considering helping our son buy his first house. Do you have any suggestions on how to approach this?

Answer: There are several ways. First, do you have the money to buy the house and then rent it to your son? Every year, you and your wife could “gift” him up to $24,000 of the value of the house (you can gift up to $12,000 per person tax- and gift-tax free). You will need an attorney to assist you with this arrangement.

Next, can you be the bank? Can you lend him the money? He would pay you a fixed interest rate, which could be even greater than you are currently getting from your investments.

Finally, you could enter into what is known as a “shared-equity” arrangement. For example, you and your wife would own 50% of the property and your son would own the other half. You have to discuss with your attorney how title would be taken. But with a shared-equity arrangement, you both pay your share of the mortgage, taxes and insurance, and your son pays you rent for the half of the house that you own.

You need a written agreement, which will spell out all of the terms and conditions regarding the property.

There are two benefits from a shared-equity arrangement. Many lenders will give you a loan based on a personal residence rather than as an investment loan. Thus, you would get the benefit of a lower interest rate. Second, although you would have to pay tax on the rental income you receive from your son, you would be able to deduct for tax purposes your share of the mortgage interest and real estate tax. You should also be able to take depreciation on the portion of the property that you rent to your son.

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Benny L. Kass is an attorney in Washington, D.C., and Maryland. Submit questions to benny@inman.com.