Should You Help Your Child Buy a Home?
As a parent, you want to help your child get ahead. Since homeownership can build wealth and increase financial security, you might wonder if you should help them buy a home. You may even feel some urgency around the question given the increase in housing prices and interest rates.
This article explores some common ways parents support their children in homeownership. The considerations may prompt you to decide whether you will assist and how.
Option 1: Fund the Home’s Down Payment
One of the most common ways parents and other relatives help loved ones buy property is by giving them the money for the down payment. In its 2021 report on generational trends, the National Association of Realtors reported that 23% of home buyers ages 22 to 30 received gifts from relatives or friends to pay for down payments. About 17% of those ages 31 to 40 received gifts.
The IRS makes it easy to give generously. For 2022, you can give up to $16,000 tax-free to your child. If you’re married, your spouse can also give $16,000 for a total of $32,000. And if your child is married, you can provide the same amount to their spouse. In such a case, that would total $64,000 for a down payment. Of course you can always give more than that amount, but you may be required to file a 709 gift tax return to let the IRS know about the gift.
The home lender will require you to sign a gift letter that states you are giving the money to your child and do not expect any repayment.
Option 2: Lend Your Child the Money
You might decide to lend a portion of the home price or finance the purchase yourself. In the former case, your loan, like a gift, could help your child qualify for a mortgage if they cannot do it on their own. In the latter case, you might want to give your kid a break with a better interest rate than they could get with a conventional lender.
Regardless, be aware that the IRS requires you to charge a minimum interest rate. Called the applicable federal rate, this minimum is generally a point or a point and a half below the average. You’ll have to report the interest income on your Form 1040.
We advise that you put all loans in writing—if not for the sake of family harmony, then for the sake of harmony with the IRS.
Option 3: Own the Home with Your Child
You might find Option 3 beneficial if your child can’t secure a mortgage on their own. By applying as a co-owner, you increase the attractiveness of a loan for mortgage providers.
If you go this route, make sure you and your daughter or son agree ahead of time on how you’ll recoup your investment. For example, will your kid buy you out later? Or will you receive a portion of the equity when you two sell the home?
You also need to be aware that you’ll be on the hook for the mortgage payment if your child doesn’t pay it.
Option 4: Buy the Home and Rent It to Your Kid
Sometimes, circumstances make buying a home necessary—and unaffordable. You might decide to help your son or daughter by purchasing the house and renting it to them.
Mortgages for second homes require more significant down payments than primary residences, and you’ll probably have a higher interest rate. You’ll also be responsible for the property’s maintenance and associated costs.
Also, remember that you won’t be able to take tax deductions on the second home if your kid is living there rent-free. You’ll need to charge them a fair-market rent for the property, which should be their primary residence.
Other Considerations
You may want to help your children—but don’t do it at your expense. If financing a loan will deplete your retirement savings or hurt your tax planning, then problem-solve with them on other ways they can get a suitable home for their needs. It can hurt to say “no” to our children, but sometimes our “no” is the best answer for everyone involved.
We also think it’s important that you consider not just the financial aspects of assistance, but also the emotional ones. Our wealth management firm in Folsom and Roseville, CA, and Lehi and Logan, UT, has seen instances where generosity has provoked family disputes. Helping your loved ones should increase family harmony, but sometimes the opposite happens.
For example, if you have decided to give your son or daughter the down payment, is the money an early inheritance? Will they be upset if their siblings receive an inheritance after you pass but they don’t? How will your other kids feel about this gift of a down payment?
Consider talking with a financial advisor about how to work home assistance into your financial plan. Our fiduciary financial planning firm helps clients make decisions like these as part of their ongoing planning.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information 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 Roseville 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.