Q: I want to let my son purchase my home but I would like to structure the sale where the loan is interest free or at a really low interest rate. I want his payments to be as low as possible, but I do not want the IRS to come back and tax me as if it was a gift. There is no mortgage on the house, so the payments will be made out to me. I would like the house to become his principal residence. Could you suggest how to structure the deal?

A: There are many ways to structure this type of a deal. The question you have to ask is, “What am I trying to accomplish with this transaction?”

Are you trying to reduce the size of your estate? Help your son establish credit? Give your son a place to live? No matter what the reason, there are several ways to accomplish your goal.

Some parents set up things up so that the title to the home is transferred outright to the child. The child then has an obligation to repay the loan to the parent. The IRS has certain rules relating to what would be considered an “arm’s length” transaction and the minimum interest rate that would apply.

Whether the current rate set by the IRS for this type of transaction is "low" enough for you will be up to you to decide. The IRS website has a page which indicates what the minimum interest rate can be for certain short, medium and long-term real estate transactions. (As we went to press, the link to the relevant IRS page is http://www.irs.gov/pub/irs-drop/rr-08-24.pdf.)

Once the loan is set up and the mortgage recorded, your son would make payments to you under the loan. Over time you could forgive these payments and even forgive part of the loan. Each person is entitled to give a gift to a single individual of $12,000 per year (as of 2008) without triggering any federal gift taxes. If you’re married, you and your husband could give your son $24,000 per year, without triggering gift taxes. If you and your son are both married, you and your spouse could give your son and his wife $48,000 per year without triggering gift taxes.

If your plan is to have your son own the home free and clear of the mortgage, you can accomplish that by gifting the $12,000 each year to your son and having your son pay the interest owed on the remaining loan balance as well as a portion of the loan on a year-to-year basis.

There are other ways of handling your situation, especially if you are trying to minimize estate taxes. An estate attorney may suggest putting your house into an irrevocable trust, and naming your son as the beneficiary. Each year, a portion of the property would be transferred to him. There may be other trust options available to you and your son as well.

If your estate is small and this is your only asset, an estate attorney may say it’s best if your son inherits the house when you die. At that time, your son would get the benefit of the stepped up basis — that is the actual value of the home at the time of your death — and if your son decides to sell the home, he would likely not have to pay any taxes.

Depending on your estate and the value of your assets you should probably consult with an estate planner to make sure you are making a wise choice.