Cash or stocks can be a simple, helpful gift for first-time homeowners

The housing market is a tough nut to crack these days. Prices are hitting the stratosphere thanks to low inventory, which is sparking bidding wars among buyers. Landing a home can seem impossible for younger buyers, who may need help with the down payment or qualifying for a mortgage.

However, buying a first home is a lot easier if the bank of mom, dad, grandparents, extended relatives and friends can be tapped.

If you want to keep things simple, gifting cash or stocks is probably your best option. If you’re worried about future estate taxes, it can help you reduce the bill. But pay attention to the gift tax laws.

The federal estate tax exclusion amount is $11.7 million for 2021 ($23.4 million for married couples). You can give up to $15,000 per person to as many people as you’d like during the year without having to file a gift tax return. If you’re married, your spouse can also give $15,000 per person, increasing the annual tax-free gift to $30,000 per person. That money offsets the value of your estate when you pass away.

After the money is gifted, the mortgage company will require a “mortgage gift letter” from your child and your child’s spouse (or partner). The letter will detail the relationship between the gift giver and recipient, the amount gifted and where those funds came from. (If the money is a loan that’s expected to be paid back, the child must let the mortgage lender know because it is factored into the debt-to-income ratio.) The lender also may require other documentation, such as bank statements.

You can also gift stocks. Ideally, you’ll want to give stocks you’ve owned for more than a year, so that your child will qualify for long-term capital gains rates when he or she sells the stocks to help finance the home purchase.

When you give stocks (or other investments) to a child, your child’s basis when he or she sells the stock will be your original basis (your holding period will also transfer with the stocks). For example, if the stock was worth $10 a share when you bought it and your child sells it for $50 a share, your child will owe capital gains taxes on $40 a share. But if your child is in a lower tax bracket, he or she may owe a lower tax bill than you would have paid — or avoid it entirely. In 2021, individuals with a taxable income of less than $40,401 (or $80,801 for couples) pay no capital gains tax on stocks. Above that, the rate is 15%, and it rises to 20% for individuals who have taxable income of more than $445,850 ($501,600 for couples).

Whether you give cash or stock, all parties involved need to have realistic expectations. For instance, certified financial planner Felicia Gopaul says her father stipulated that his cash gift be used to buy a home that she could afford and not necessarily the home she wanted, pointing out that she and her husband could always upgrade to a bigger home later.

Rivan Stinson is a staff writer with Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.