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Retirement plan withdrawals for first-time homebuyers.
After December 31, 1997, an individual (any ancestor of the homebuyer
or spouse) can take up to $10,000 out of a retirement plan penalty-free
for acquisition costs for a first-time homebuyer to purchase a principal
residence. A first-time homebuyer is a person (including spouse)
who has not owned a home in the last 2 years. Regular income tax
is owed on the withdrawal, but the 10% penalty is waived.The $10,000
amount is a total lifetime amount. Of course, the stickler here
is that tax (use 33% combined State and Federal) must be paid on
withdrawal.
Gifts of $11,0000.
Each year every person may make tax free gifts totaling $11,000
to any other person. Gifts in excess of this tax free $11,000 amount
are "taxable gifts" which must be reported on a Gift Tax
Return and begin to use your lifetime exemption. It applies to an
unlimited number of recipients, who do not need to be family.
Gifts of over $11,000 per person per year
For instance, Parents can give Daughter and her Husband $44,000
tax free, every year. Gifts in excess of this amount in one year
will cut into the Parents' lifetime exemption (currently $1 million
each), but will not require payment of a tax unless the Parents'
exceed their lifetime exemption. Later when the Parents die, they
have used up a portion of their lifetime exemption, but if their
estate is not large enough to exceed the remaining exemption, there
will be no detrimental effect on gifting to the children as they
have.
Gifting some, Loaning the rest and Gifting Loan Repayment
In this example, Daughter needs $100,000 down payment. Parents
gift Daughter and Husband $44,000 and lend then $56,000, receiving
a note and trust deed. Loans are not gifts and do not count toward
the annual gift rules. The next year, the parents write a check
for $44,000 to Daughter and Husband and Daughter and Husband repay
$44,000 of the loan. The next year, the parents write a check for
$12,000 to Daughter and Husband and Daughter and Husband repay the
remaining $12,000 of the loan. Daughter and Husband must also pay
the appropriate IRS mandated interest on the loan to prove that
it is a loan, not a gift. In this manner, parents who have $100,000
extra can in essence gift an amount in excess of the yearly $11,000
exemption while complying with the Internal Revenue laws.
Parents equity share.
Parents put up $100,000 down and go on title equity sharing with
the children. The first year the parents transfer $44,000 of equity
to the children as a tax free gift. The second year they do the
same. The third year the remainder is transferred. There is no tax
consequence to either parents or children.
Stock Market Funds
Over the past few years of the stock market downturn equity sharing
has become a popular investment that promises to replace the stock
market. Stock market investors find that investing their funds in
real estate provides reliable long term appreciation and tax benefits
that the stock market cannot provide. They also find that buying
with a partner makes their investment contribution bite size and
therefore comparable to buying into mutual funds.
Investors can also roll over their retirement accounts into equity
share investing in real estate through a self-directed retirement
account. There are a few limitations, one of which is that the loan
on the property cannot be more than 50% of the property's value.
The information provided above is general in nature and thus,
may not apply to your situation. Before relying on this information,
you should consult with your legal and/or tax professional.
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