Sugar daddies: More parents helping with mortgages

The tightened lending standards are keeping a lot of young borrowers on the sidelines in home buying today. That’s where parents are stepping in.

More parents are taking on the role as mortgage lenders to help their kids take advantage of low home prices and record-low mortgage rates. In fact, one in three first-time homebuyers either received a gift or loan from their families for a home purchase made in 2011, according to National Association of Realtors’ research.

But parents who enter into a gift-giver or mortgage lender role need to make sure they follow some tax guidelines.

The federal government has rules on how much you’re allowed to gift. For 2012, individuals can give up to $13,000 tax free in one year without having to pay gift taxes. Married couples can give up to $26,000 a year.

Some parents are acting more as a mortgage lender. They can set up an arrangement where they charge interest on the money they lend, but the interest charged must be based on the IRS’s “applicable federal rate” minimum for various loan maturities. Still, those rates are even far below today’s record-low mortgage rates.

Parents will need to pay income taxes on any interest earned on the loans. However, the return may be better than what they can get for a low-interest CD or money market fund.

As for the children, they’ll still be able to deduct the mortgage interest on their federal income taxes.