How to Help Your Kid Purchase Property
With housing prices on the rise across the country, you may feel like you want to help an adult child (or grandchild) out with a home purchase. But what should that support look like? This article outlines some common ways to help your kid buy a house and some issues to look out for.
Provide the Down Payment
It’s common for parents to chip in with the down payment or cover it entirely. The National Association of Realtors reports that nearly a quarter of homebuyers ages 22 to 33 received cash gifts from family and friends for their down payments.
Cash gifts help avoid the taxes that a loan may incur. For 2022, you can give up to $16,000 tax-free per recipient. Your spouse can also give $16,000. That means you can put $32,000 toward a down payment on your son’s or daughter’s new house. If they’re married, you could double that amount to $64,000.
Your child’s lender will require you to provide a gift letter where you state that you are offering money as a gift and do not require repayment. You may also need to send them your recent bank account statements.
Lend the Money
You may decide to lend money to your child to buy a home—whether for the full amount or a portion of it. As interest rates increase, you might enjoy knowing you have helped your child secure a lower rate; however, be aware that you must charge the IRS’s minimum interest rates.
Co-own the Home
Your name on the mortgage could help your child secure financing if their own finances or credit history will not. Your child can later buy you out. Alternatively, you can decide on the portion of the equity you will receive when they sell.
Be aware that if your daughter or son cannot make the mortgage payment, you will have to cover it or watch your credit score drop.
Rent Out Your Second Home
You can rent investment property to your child. If you’re new to investment property, think through the decision carefully before you buy.
Mortgages for second homes require a bigger down payment and generally have higher interest rates. You’ll also be responsible for the property’s upkeep and associated costs.
You may be able to take tax deductions on your second home—but not if your child lives there rent-free.
Issues to Consider
Before you take any action, you have several considerations. First and foremost, how will your assistance affect your finances? As a parent, you want to support your child, but you also don’t want your generosity to imperil your retirement. Meanwhile, your child’s income potential is likely to climb. They may not be able to finance a home now, but that can change.
Consider talking with a financial advisor if you’re unsure how your gift or loan will affect your retirement. Our Denver area financial planning firm routinely helps clients answer questions like these as part of their ongoing life planning.
In addition to the financial impact, you’ll want to look at the home as part of your broader legacy. Should your son or daughter consider this gift an early inheritance? Will they be upset if they don’t receive an inheritance after you pass but your other children do? How will your other children feel about your assistance?
We get how complicated family dynamics can be. It might help you gain clarity by talking to your financial advisor, close friend, or counselor before making your decision.
Final Thoughts
When it comes to helping your son or daughter buy a home, your choices include cash gifts, loans, co-ownership, and renting property to your child. All these options come with financial and tax impacts, not to mention emotional ones. A thorough assessment of your options can help you decide on the best one for you, your child, and the entire family.
We offer a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.
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