Helping Your Adult Child Buy a Home: A Parent’s Guide
As a homeowner yourself, you understand the challenges of an expensive real estate market. Your adult child might be struggling to afford a home, and you’re considering stepping in to help. It’s a decision many parents face, and while it’s a generous gesture, it’s crucial to weigh the implications carefully—for both you and your child.
UNDERSTANDING YOUR OPTIONS
Funding the down payment: One common way to help is by providing the funds for the down payment. This option can be a straightforward gift, reducing the financial burden on your child. However, consider the tax implications and the fact that gifting a significant amount may impact your retirement savings.
Lending money: Providing a loan to your child for their home purchase is another route. This approach helps keep your finances more secure since it’s a loan, not a gift. But it’s important to set clear terms and understand that family loans can sometimes lead to misunderstandings and cause strain to relationships. The IRS also requires that you charge a minimum interest rate that you need to be aware of.
Co-ownership: Buying the property with your child means sharing the cost and ownership. This arrangement can be beneficial, but consider the long-term implications. Those can include your liability for mortgage payments and the potential complexities when you or your child decides to sell.
Buying and renting: Purchasing the home and renting it to your child can be a win-win. You have an investment property, and your child has a home. However, this makes you a landlord, with all the responsibilities and risks that come with it. You also must charge rent rather than give your kid a rent-free residence if you want to take a tax deduction on the home.
WEIGHING THE PROS AND CONS OF HELPING WITH A HOME PURCHASE
Pros:
Emotional satisfaction: Helping your child can be deeply fulfilling.
Potential financial return: Options like co-ownership or buying to rent can offer financial benefits in the long run.
Strengthening family bonds: Financial support may strengthen your relationship with your child.
Cons:
Risk to retirement savings: Your generosity shouldn’t compromise your financial security in retirement.
Potential relationship strain: Money matters can sometimes lead to misunderstandings or disagreements within the family.
Tax implications: Gifts and loans can have tax consequences that need careful consideration.
MAKING THE RIGHT DECISION
To decide the best course of action:
Evaluate your financial situation: Ensure that helping your child won’t jeopardize your retirement. It’s not selfish to prioritize your financial security.
Discuss with your child: Have an open conversation about their needs and your capacity to help. Transparency is key.
Consider the long-term impact: Think about how your help will affect you and your child in the long run, both financially and relationally.
Seek professional advice: Consulting a fiduciary financial advisor can provide clarity. They can help assess your financial situation and guide you through the tax implications and legalities of your decision.
FINAL THOUGHTS
Helping your adult child buy a home is a noble gesture but requires careful consideration and planning. Each option has its benefits and drawbacks, and the right choice depends on your financial situation and family dynamics. Remember, helping your child should not come at the expense of your well-being. It’s essential to strike a balance between generosity and practicality.
While this article offers a starting point, working with a fiduciary financial advisor can provide personalized guidance to help you make sure that your kindness today doesn’t become a financial strain tomorrow. At Parkshore Wealth Management, we’re here to provide information and guidance to our clients, prioritizing financial health and family harmony above all.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.