How to Help Your Child Buy a Home

In today’s market, young first-time homebuyers may find themselves weighed by student debt, high home prices, and stringent mortgage requirements. As a result, parents are now stepping forward more often to lend financial help.

But even if you have the means to help your child buy a house, there are potential risks to consider. You’ll also want to carefully consider all your options for helping before you determine which is the best strategy for your family.

Key Takeaways

  • One way to help your child buy their first home is to gift them cash for down payment.
  • Other ways including cosigning a loan, providing the mortgage, or taking out a joint loan with them.
  • If you help with cash, be aware of whether you need to file a gift tax return.
  • Avoid raiding your retirement funds or going into debt to help you child own a home.

Ways to Help Your Child Buy a Home

Almost a quarter of homebuyers ages 22 to 30 reported that cash gifts from family and friends were a source of their down payments, with 5% saying they had received loans from relatives or friends, according to a 2021 National Association of Realtors report.

You can help you child buy a home in many ways. For example, you can simply buy a home outright in your name and renting or giving it to your child. Real estate is an investment opportunity, and there are millennials from coast to coast living in apartments that are legally their parents’ property.

Other possibilities include:

  • Provide all or some of the down payment for the child’s home.
  • Co-own the house with your child. Your would get a share of equity in the home and you would get your money back when it is sold.
  • Buy a multi-unit property or a place big enough for roommates to offset the cost.
  • Finance your child’s home purchase yourself and provide them with a mortgage from your funds. A mortgage servicer can help properly structure the loan and its payment terms, and can even generate monthly statements and tax forms.

Tax Implications of Cash Gifts

For tax reasons, parents often opt to give offspring the money they need as a gift rather than pay the costs directly. The 2023 annual gift tax exclusion is $17,000 per donor for each recipient. If you stay under the annual exclusion, then there is no need to file a gift tax return.

For example, you and your spouse could give your child and your child’s spouse a total of $68,000 ($17,000 × 2 gifting parents × 2 recipients) gift in 2023. That amount will not count as income or be subject to federal income tax on your child’s tax return.

However, if any one gift is given that exceeds the annual tax exclusion amount, then the gift giver will need to file IRS Form 709. This form is used to report and track total gifts given, which exceeded the annual limits in any one year, during the taxpayer’s lifetime. It reduces the taxpayer’s lifetime estate tax exclusion. The purpose is to discourage taxpayers from giving away all of their money during their lifetime in an attempt to avoid the estate tax after death. 

The gift, even when reported on Form 709, is not taxable in the current year if it does not exceed the taxpayer’s remaining lifetime gift limit. As of 2023, the estate tax exclusion is $12.92 million. Because the lifetime limit is so high, most taxpayers will not be faced with paying gift tax. Rather, the main concern is whether or not you will need to report your gift on Form 709.

The money you give as a gift to your child needs to be sourced, tracked, and documented. To safeguard the transaction, use a mortgage professional.

Before You Sign a Mortgage

Some lenders require all parties on the title to be on the mortgage contract. Even if the intent is for the child to handle the monthly mortgage payments, the parents are also financially responsible for the debt. Yet, if the parents are not on the mortgage, then they cannot take advantage of the mortgage interest tax deduction.

Even an interest-free loan from a parent to a child might incur tax liability for the parent. The IRS assumes that you earn interest even if you don’t, and that’s taxable income. Parental loans add to the child’s debt burden and could hurt the child’s chance of qualifying for financing in their own right. On the positive side, a properly recorded loan allows the child to maximize deductions at tax time.

Even if the parents provide a down payment, the child will still have to qualify for the mortgage, and that includes having cash reserves on hand, a steady job, and a stable income.

If you cosign for a mortgage, and the child defaults, then your credit history can be affected. You and a cosigner are equally responsible for paying the loan.

Cash Gifts

Mortgage lenders typically allow the down payment on a primary home to be made up completely or partly of cash gifts so long as other requirements are met. For example, Freddie Mac’s Home Possible mortgage, allows the entire 3% required down payment to come from gifts.

Potential Tax Savings

Parents who buy a home and allow their child to live in it might be able to take significant tax deductions. Property taxes, mortgage interest, repairs, maintenance, and structural improvements are generally deductible on a second home.

However, while a landlord can deduct up to $25,000 in losses each year, parents may face different rules when renting to family members. If the child pays no rent, then the situation is considered personal use of the property, and rental-related deductions are not allowed. However, if the child has roommates who pay rent, then the parent may be able to take the rental-related deductions while allowing the child to live there rent-free.

Tax Complications

Mortgage interest deduction may only be taken by a person who pays the mortgage and owns (or jointly owns) the home. If the parent holds the property title but the child makes the mortgage payment each month, then neither qualifies for the interest deduction. If the child owns any percentage of the home, then they can deduct the share of the interest that they actually pay.

Note, however, that splitting interest with your child to both claim the mortgage interest deduction complicates your tax filing. In the case of multiple owners who are unmarried and jointly liable for the mortgage, it is common for only the first person listed on the loan to receive IRS Form 1098 from the mortgage lender. The parent and child co-owners are able to split the interest for the mortgage interest tax deduction, but the split should be based on what was actually paid by each owner during the year.

Both parent and child need to attach a supplemental statement to their tax returns explaining the split of the mortgage interest and deviation from what was reported to the IRS on Form 1098. The person who did not receive Form 1098 will also need to document the name and address of the taxpayer who did receive the full interest reported in their name on Form 1098.

A detailed payment record does not need to accompany the tax return, but you should keep the information for several years in case of an audit.

Building Equity and Long-Term Investing

Helping with mortgage payments might make more financial sense than giving a child a monthly housing allowance or paying the monthly rent. Paying off a mortgage builds equity in the home, and homes turn into assets—usually appreciating assets.

Just bear in mind that residential real estate is best considered a long-term investment. As a rule, most buyers must keep a home for three to five years just to break even.

If parents opt to make a low-interest loan to the child, becoming in effect the mortgage lender, then they will enjoy a bit of income from the monthly payments. Even a low-interest loan can beat the return of many conservative investments.

The High Cost of Second Homes

If you’re considering buying another home and putting the title in your child’s name, you’ll want to consider the additional costs. Houses purchased by parents as second homes or as investments often require bigger down payments. They don’t qualify for the generous mortgages geared toward first-timers, such as Federal Housing Administration (FHA)–backed loans.

“The difference between a primary [home] mortgage and an investment-home mortgage is significant,” said Linda Robinson, a Realtor and loan officer with Cabrillo Mortgage in San Diego. “You have to put down at least 20% to 30% on investment property, and the [interest] rates are a little higher, too. If the kids are creditworthy at all, the parents may be better off being cosigners and gift-givers than being the ones on the loan.”

Risks of Cosigning

If a parent cosigns for a mortgage and the child falls behind on payments, then the parent’s credit rating is hurt just as much as the child’s. As a cosigner, the parent is ultimately responsible for the debt.

A parent who cosigns for—or gives money to—a married child who then divorces could get entangled in a messy division of assets. They could lose some or all of the investment to the child’s ex-spouse.

Navigating the Emotional Cost

Financial entanglement in families can cause stress and conflict. Siblings outside the exchange may feel jealous or resentful. Gift givers can find themselves frustrated by what they perceive as misuse of the gift but powerless to do anything about it. Gift receivers may feel frustrated by the strings attached to a gift in the form of expectations and rules.

Some parents don’t enforce consequences when their child fails to hold up their end of the bargain. Financial arrangements among family members can often lead to misunderstandings and be difficult or impossible to enforce.

The Rewards of Helping Out

Buying a home for a child or providing financial assistance has many advantages. For example, it can give the child the tax benefits of homeownership and help them build a good credit history.

The purchase may be a smart move financially if the parents’ assets are considerable enough to trigger estate taxes or inheritance taxes. Diminishing the estate now, through multiple strategic annual gifts up to the annual gift tax exclusion, could diminish the tax burden in the future.

The property is an investment that might ultimately help the parent break even or turn a profit, with the expenses along the way being tax-deductible. 

Don’t Sacrifice Your Own Financial Stability

Parents should never buy a child a house if it means compromises their own financial situation. They should be able to pay their own bills, meet their own mortgage payments, or maintain their standard of living in retirement as they help their child buy a new home.

Consider all the risks if you are getting funds from a retirement account or taking out a second mortgage on your home to help you child buy their own property.

Finally, there may be emotional consequences to helping a child if your agreement creates tension. No matter how you decide to approach it—gift, loan, co-ownership—put it in writing and treat your agreement as a business arrangement.

Can You Buy a House In Another Person’s Name?

Yes, you can buy a house and put the deed in another person’s name such as your child’s or parents’ names. However, consider all the risks of buying a home and putting another name on the deed. For example. if you put a home in your child’s name, and your child fails to pay their creditors, the creditors may place a lien on the home.

How Much For a Downpayment Can You Give a Child With Paying Tax?

As of 2023, you can give gifts of up to $17,000 without paying the gift tax. A gift is considered property, including money, in which you give to another person but do not expect any goods or services in return.

Can You Get a Joint Mortgage With Your Child?

You can get a joint mortgage with your child. Joint mortgages are mortgages in which two people pool their resources to qualify for a loan for a home. Both parties are responsible for repaying the loan, however only one may be listed on the title. A joint mortgage is a common way parents help their children buy their first home.

The Bottom Line

Providing your adult child the means to purchase a home can provide them with an asset that can give them financial stability. However, there are some downsides to consider as well. Consider consulting a financial professional to guide you through how to best assist your child with buying their first home.

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