A young married couple may find it well nigh impossible to purchase a new home in the current financial environment.
If both of the spouses have student debt, the repayment of those loans can drain excess cash from the couple’s cash flow.
Then too, qualifying for a mortgage loan generally requires as much as a 20 percent down payment, and if a couple is considering an $180,000 home, the down payment would amount to $36,000.
Not every parent is solvent enough to consider a loan of $180,000 to a son or daughter, but if you are, the time has never been better to pull the trigger on that transaction.
When intra-family loans are made, the IRS requires that the interest rate that the lender charges must be at least equal to the prevailing AFR, or applicable federal rate. These rates are short-term, mid-term or long-term and are based on the duration of the loan.
Short-term rates apply to loans of less than one year; mid-term rates are used for loans greater than one year, but less than three years, and long term rates are for loans that extend beyond nine years.
The current AFRs are published monthly by the IRS and may be found on their website, www.irs.gov.
The short-term rate published this month is a minuscule 0.31 percent; the mid-term rate is 1.80 percent; and the long-term rate is 3.02 percent.
So consider this fact: if you were to loan your son $180,000 for a period of 20 years, you may charge him this 3.02 percent interest rate for the entire duration of the loan, regardless of what the current mortgage interest rates rise to.
Naturally, you would include in your income each year the annual total of the interest component of each loan payment, or $5344.36 in the first year, if the loan was made on Jan. 1.
If you don’t charge your son at least this amount of interest, then there may be income tax and, possibly, gift tax issues as well. Gift taxes are usually not a concern, due to the lifetime gifting limit being so high. The limit this year is $5.34 million for a single person and $10.68 million for a married couple who make a gift together.
The IRS and courts look at several factors in determining whether a transaction is a loan or a gift.
An intra-family loan is more likely to be viewed as bona fide if there’s a written agreement, the called-for interest rate is actually charged and a fixed repayment schedule is called for in writing.
Additionally, the borrower should execute a promissory note and actually make the payments when called for by the loan agreement.
Follow up to last week’s column I had a serendipitous encounter at last week’s North American Bridge Championships in Las Vegas when I met an individual who works for the Social Security Administration in the Disability area.
This person actually writes the opinions for the judges who determine whether or not a claim of Social Security disability benefits will be approved or not.
The gentlemen told me that the number one reason that such a high percentage of disability claims are denied is a lack of supporting medical documentation.
Many claimants think that the SSA will follow up with health care providers to obtain all pertinent medical information, but these claimants are mistaken: the SSA will only request the information from the health care provider, and they will not follow up.
As a result, if you are filing for Social Security Disability Benefits, you must be diligent about obtaining up to date medical records yourself, lest your claim be denied due to a lack of supporting medical justification.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience. Got a financial planning question for Greg? You may email him at email@example.com.
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