We know it’s absolutely crazy, but your kid is reaching a major adult milestone: homeownership! Time sure does fly, but let’s not dwell. Like any good parent, you have questions, concerns, worries. You want to help, and you know that your support could make all the difference in your kid’s future. But, as with any other major financial decision, there are a lot of considerations to take into account.
As a homeowner yourself, you must be wondering, “Can I buy a house for my child? Is it okay for me to risk some of my own financial security to lend a hand? Do I feel comfortable letting my kid take the financial reins if my name is on the paperwork, too?”
Helping a family member purchase a home is a whole different ball game than buying one for yourself, so we’ve outlined some options like cash gifts, loans, rental agreements, and encouraging the next level of personal responsibility in your adult child’s life.
Homeownership For Your Child
Should I buy a house for my child?
If you have the resources to buy a property for your child, there can be tax benefits for you and an opportunity for your child to make a solid start for their future.
Helping your child buy a home can be complicated. The most important thing is to be sure you’re in a position to help without hurting yourself financially in the process.
What are a few ways I can help my kid buy their first home?
Cash gifts: If you stay under the IRS maximum, gifting your child money for their first home is a tax-efficient way to transfer your wealth to the next generation.
Loans: Loans can be tricky, and most times can't be used for a down payment on your child's new home. You'll also need to charge a minimum interest rate on loans over $10K, and report interest income on your federal tax return.
Co-signing a mortgage: This can be the easiest solution to helping your kid buy their first home, but it comes with risks for you if they get in over their heads. Open communication here is vital to everyone's financial well-being.
Purchasing a home to rent to your child: This option has a number of benefits for all parties, not the least of which is a guaranteed roof over your kid's head. Expenses associated with the property can be written off your taxes, all while the property appreciates in value.
How Much Can You Afford to Help?
Helping your child buy a home should never come at the expense of your short- or long-term financial well-being and goals. Your diligence with financial matters is why you’re in a position to even consider helping your child with homeownership. Don’t abandon your strong financial management when considering your options. You should continue to prioritize your own bills, mortgage, property taxes, and retirement savings.
This is the “put your oxygen mask on first” rule-of-thumb that you’ve employed in raising them up to this point. Don’t change your approach now.
No matter how you decide to help and how much you can prudently offer, make sure you get everything in writing. To avoid misunderstandings, surprises, or hurt feelings, treat your agreement like a business deal. Besides, it’s another opportunity to teach your kid how to “adult” financially.
Strategies To Help Buy A House For Your Child
You’ve determined that you’re in the fortunate position to help your child buy a home. From here, you’ve got a number of options that can benefit both of you in the long run if you make a solid plan now.
Give them a cash gift.
Cash gifts are about as straightforward as it gets. You can give your child up to $17,000 as an individual or $36,000 as a couple to avoid dealing with a gift tax return (double these amounts if you’d also like to gift to your child’s spouse or partner). While not everyone needs to worry about the long-term tax implications of gifting above the IRS gift limit, it’s something you may want to keep in mind. Many mortgage lenders will often accept down payments either partially or fully funded through cash gifts.
While your child invests in a home, hopefully appreciating in value, you’re simultaneously transferring your wealth in a tax-efficient way.
You purchase, your child rents.
Buying a second home is usually more expensive than buying the first because it is considered an investment property versus a primary residence. Lenders often require larger down payments to the tune of 20% to 30%, plus higher interest rates. That’s a lot of upfront expense, but there are benefits for you and your child.
As the property owner, you may be able to charge below-market rent. This way your kid can use more of their hard-earned income to pay down student debt, contribute to savings or retirement accounts, and keep a little left over to enjoy life. You can breathe a bit easier knowing the health of their financial future is taking good shape, and they’ve got a guaranteed roof over their heads in perpetuity.
Altruistic acts always come back around, and in this case we’re talking about rental income and significant tax deductions for you. On a rental property, you get to claim repairs, property taxes, and interest as rental deductions on your taxes. All things considered, this could be a win-win if you set clear expectations and lines of communication remain open. Let them know it’s okay to ask for help if they need it.
Loan your child money.
If loaning your child money seems like a simple option – it isn’t. They’ll have to make the full down payment with their own money before using the cash from your loan. The win here is that a loan can reduce their mortgage to 80% loan-to-value, meaning that your child won’t need private mortgage insurance (PMI), so that’s a win.
The IRS is going to keep you honest by making sure you aren’t dressing a loan up in gift’s clothing. You’ll have to charge your kid interest on loans greater than $10,000, and that interest must be reported as income on your federal tax return. The minimum rate is called the applicable federal rate (AFR), and right now it’s about 2.21% for shorter-term loans and a smidge higher for longer ones.
To secure a loan using the property as collateral, you’ll need a promissory note and deed of trust to formalize the loan agreement. Services like National Family Mortgage can assist in setting up and documenting the loan.
Co-sign a mortgage.
Even if your child’s credit and income are good, the combo is likely insufficient to secure their own mortgage. Co-signing for a mortgage is a helpful way to support your kid, but it’s also a substantial risk. Late or missed payments negatively impact your child’s fledgling credit, and the credit history you’ve worked your entire adult life to achieve takes a hit, too. If your kid stops making payments, you’re on the hook for the whole enchilada.
Insist on access to the online mortgage account, and request late and missed payment notifications from the lender. Maintain a three-month emergency fund. Make sure your child knows that everyone hits speed bumps and it is always okay to come to you if they’re having trouble.
Final Thoughts
We know there’s a lot of history between you and your kid, but eliminating emotional decision-making as much as possible and setting clear expectations is essential. All parties should go into this agreement with an “all for one, one for all” mentality.
Working with a financial planner can add an element of formality to this endeavor, and help both you make the best decisions for your futures, both as individuals and as a family. The complexities surrounding real estate transitions and financial arrangements are real, so seeking professional assistance can smooth out the process for everyone.
For 25 years, we’ve worked to perfect The Integrated Financial Advantage™, a unique financial planning approach crafted to provide clients with tailored guidance, enabling them to lead with intention both tomorrow and today.
