October 11 , 2009 - My wife and I would like to help our daughter to buy her first home. I know there are incentives for first-time homebuyers, but how can we help?

Despite improvement in some areas, it's still the worst of times for many homesellers, particularly those who bought near the peak of the market. Thanks to dramatic drops in selling prices, it's also the best of times for those looking to become homebuyers, particularly those who can turn to well-off parents or grandparents for financial assistance.

First-time homebuyer credit. Individuals who become first-time homebuyers in 2009 are entitled to a refundable tax credit if they make their move before Dec. 1, 2009. The refundable tax credit is equal to the lesser of 10% of the purchase price of a principal residence or $8,000.

Other tax benefits produced by first time homeownership. Often, first time homeowners also will become a first time itemizers due to the deductions for interest and property taxes, enabling them to deduct expenses (e.g., medical, charitable, miscellaneous itemized deductions) they couldn't claim before.

Tax benefits in helping kids become homeowners. Those able to help their children or grandchildren become first-time homeowners can do so in a number of tax-wise ways:

Make cash gifts. The annual per-donee gift tax exclusion ($13,000 for 2009), makes it possible for parents to give children major assistance with the downpayment for a home purchase. Each parent can give $13,000 to the child, for a total of $26,000, and if the child is married, each parent can do the same with the son- or daughter-in-law, for a total gift-tax-free amount of $52,000 (grandparents also can chip in).

Make gifts of appreciated assets. Instead of making a cash gift to help with the downpayment, a parent or grandparent may consider gifting appreciated stock, mutual-fund shares, and other securities that have been held for more than one year to their children if the latter are lower-bracket taxpayers. The children can then sell the securities. This turns a gain that would be taxed at 15% if the parents sold the securities into a tax-free gain.

Make a low-interest loan. A parent can consider giving a child a loan (instead of, or in addition to, a gift of cash or securities) to make first-time homeownership possible.

The loan can cause complex imputed interest problems if it's a "below market interest" loan. If a below-market (or interest-free) loan is a "gift loan" (that is, a below-market loan where the forgoing of interest is in the nature of a gift) that exceeds $10,000, it's treated as: (1) a loan to the borrower/donee in exchange for an interest-paying note, and (2) a gift to the borrower of the funds to pay the interest. The amount of the gift equals: the forgone interest-excess of interest payable at the applicable federal rate over actual interest payable-if the loan is a demand loan; or the excess of the amount loaned over the present value of all payments required under the terms of the loan, if the gift loan is a term loan.

However, a parent can avoid all of these problems-and still give the child a major break-by charging the child interest at the appropriate AFR, which is very, very low these days. For example, for loans made in September, the short-term AFR (term loans with a term not exceeding three years) is .84%, the mid-term AFR (term loans over three years but not over nine years) is 2.83%, and the long-term AFR (term loans over nine years) is 4.29%.

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