Whether the new place is for you or for your children, here’s how you might align the purchase with your larger goals
Note: For U.S. citizens only.
If you’re one of the millions of Americans house-hunting, consider these ideas for making the purchase of a home support your big-picture plans for your wealth. Some of these approaches are new; others can help keep your assets intact, lower your taxes, increase your borrowing power, and more.
1. First, identify your overall intent for your wealth, and how buying the home fits in.
“Take the view from 60,000 feet up,” says Seth Dubrow, a New York-based Wealth Strategist. Among the questions you might want to ask:
2. If privacy or creditor protection is important to you—consider having a trust or an LLC purchase the home.
For U.S. citizens: A good reason to have a trust, LLC or similar corporate entity purchase a home is to keep information about its ownership private. But don’t make a common mistake—naming yourself as a trustee of the trust, or manager of the LLC will reveal your identity. And even if you avoid this pitfall, know that your privacy may not be ironclad; deeds of trust, for example, might still reflect your ownership.2
Having a trust or an LLC own the property also can help protect the home from creditors, including a divorcing spouse. It also can confer benefits [when a house is passed down to heirs.
One advantage of the LLC is that it’s “a dynamic, flexible structure you can revise, unlike an irrevocable trust, which is much harder to change,” says Brandon Ross, a J.P. Morgan Wealth Advisor for Washington, D.C., and Baltimore. But be careful of state law; for example, if an LLC owns your primary residence in Florida, you would lose the substantial property tax benefits of Florida’s homestead exemption. Offsetting considerations include the potential loss of tax benefits (e.g., gain exclusion on sale of principal residence, mortgage interest deduction) if the LLC has more than one member. Consult with your advisor about what type of entity might suit your situation best.
If you are not a U.S. citizen, speak with your advisors to see what types of protections may be available to you.
3. If you’re helping children buy a house, or buying it for them, weigh all your options.
Many people simply gift a child money to help them buy a home, or even buy the home for them and let the children live there rent-free. That seems straightforward enough.
But U.S. taxpayers be aware:3
The IRS would consider either the money or the value of living rent-free to be gifts. Of course, you and your spouse can each give $15K a year tax free as an annual gift to as many people as you like. If the value of the rent is any more, that would eat into some of your lifetime gift tax exclusion amount (which is $11.4 million per person in 2019, and adjusted annually for inflation).
So make sure such a gift will fit into your overall estate plan. If it doesn’t, consider charging your children rent, suggests Ross. (But note that rent would add to your taxable estate.)
Another option is to lend money to your child at a better rate than a bank would. Just be careful that the rate you charge your child is not lower than IRS’s published intra-family rates (or your loan will be considered a gift).
A last option: If you already have a trust for your child, you could have it make the purchase (if it has sufficient funds). You also might have an LLC purchase the home.
4. Know all your financing options—and match them with your goals. 4
Can you purchase the home outright? If so, the new U.S. tax law has provisions that make this attractive to U.S. taxpayers. The interest you pay on loans used for investment purposes is fully deductible, while mortgage interest deductions are generally capped at $750,000 of debt a year. Therefore, you may want to pay cash for the home, then borrow against the property and use the proceeds to invest. (To learn more about strategies to consider under the new tax law, and the nuances involved, click here.)
U.S. purchasers: If you are taking a mortgage, think long with rates still near historical lows. “Since the yield curve has flattened considerably, we are seeing more home buyers going longer than we did a few years ago,” says Dan Alter, Midwest Mortgage Team Lead for J.P. Morgan Private Bank.
But be sure to consider all approaches that may suit your situation. If your cash flow or income tends to be inconsistent, explore an interest-only loan, which would let you pay down your mortgage when the time is right for you. Or perhaps you have a substantial portfolio and want to pledge marketable securities in lieu of a down payment (the “pledge mortgage")?
(Of course, it is important to remember that this credit is secured on your home and your home may be repossessed if you do not keep up repayments on your mortgage.)
And if you are buying or selling high-end real estate in New York City, be sure to speak with your advisor about the new taxes on such transactions, effective July 1, 2019. Read more about taxes rising on NYC real estate sales.
Once all of your financing plans fit your goals, all that remains is to make sure you’re ready, with a mortgage pre-approval in place, so that when you find the perfect property, Alter says, “you’ll be in position to execute cleanly, quickly and efficiently.”
We can help
Your J.P. Morgan advisor is available to work with you and your tax advisors to help you make sure that you pick the home buying strategy that suits you, your family and your goals.
1 In community property states such as California, titling may be less important in determining ownership.
2 This varies by jurisdiction. To ensure that vesting title in an entity won’t jeopardize protections offered under law, consult your legal and tax advisors
3 Non-U.S. taxpayers are advised to check with legal counsel familiar with their country’s laws.
4 Advice given here is for U.S. taxpayers only.
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