How to Help Your Kids Buy a House
You’ve seen your child through all the milestones of growing up. What about one more important rite of passage: buying a house?
Home ownership is something many young adults look forward to. Yet a growing number of Millennials need help from parents and/or grandparents to make it happen. The National Association of Realtors reported that nearly a third (32 percent) of first-time home buyers relied on financial support from family members to fund their purchase, either in the form of a gift of money (26 percent) or a loan (6 percent). And in a separate survey, loanDepot reported that 75 percent of Millennial homebuyers (ages 18 – 35) who received financial support from their parents said that they needed that assistance to buy a new home.
While helping your child financially often feels like the right thing to do, it’s important to first consider whether your act of generosity will jeopardize your own financial future in any way, especially if you’re close to retirement. Assuming you can do without those assets, here are five options for giving your child a leg up on homeownership.
1. Make a cash gift. The most straightforward way to provide assistance is to simply give the money needed to purchase a house to your child. In 2015, you can make a gift to a loved one of up to $14,000 ($28,000 if you are married), which is completely disregarded for gift tax purposes. If your child is married, you can also make a gift to his or her spouse, effectively doubling the amount your child can put toward the purchase of a house. Of course, you can choose to give more; however, you’ll have to file a gift tax return, and you’ll begin to eat into your $5.43 million ($10.86 for married couples) lifetime gift tax exemption amount. One thing to keep in mind: You’ll want to make your gift well in advance of your child needing it. That’s because some lenders want assurance that the money isn’t a loan for a down payment.
2. Be a lender. Lending money to your child for a house can make sense, especially if you think you may need the funds later on. Many parents make interest-free loans. For tax purposes, the loan itself will not be treated as a gift. But the foregone interest could be treated as a gift based on the following rules:
- If the cumulative loans to a child do not exceed $10,000, the loans are ignored completely.
- If the cumulative loans to a child total $100,000 or less, the amount treated as a gift of foregone interest is limited to the child's net investment income. If the child has net investment income of $1,000 or less, it will be treated as zero.
- If the cumulative loans to a child exceed $100,000, the parent will be treated as making a gift of the foregone interest based on the applicable Federal rate (2.82 percent long term-rate for August 2015).
Also note, if a parent is treated as making a gift of foregone interest to a child, the child is treated as paying that amount back to the parent, which would be taxable to the parent as interest income.
3. Co-sign the loan. If your child doesn’t qualify for a mortgage, you may want to co-sign a loan with him or her. Doing so means that you’ll be legally responsible if your child fails to pay the mortgage, property taxes or insurance on time. For this reason, you’ll want to co-sign a loan only if you are confident that your child has stable employment and sufficient income to meet the required mortgage payments and/or you are financially able to step in and make those payments if needed.
4. Buy the house together. Some parents help their kids by purchasing property together in what’s called a shared-equity arrangement. You and your child split all the ownership costs and your child also pays you rent for your share of the home they occupy. At some point in the future, your child can either buy out your interest or you two can decide to sell the house and split the proceeds (assuming the house is sold at or above your purchase price). In the meantime, you’ll receive ongoing rental income and tax benefits. A caveat: If your child gets divorced, the property could get caught up in the divorce proceedings. Also, if your child hits a bumpy patch financially, you’ll be responsible for meeting the mortgage payments on the property.
5. Become a landlord. Another alternative is to buy a home and then rent it out to your child, with the goal of either selling or gifting the house to him or her down the road. In the meantime, you become a landlord with all the risks, rewards and responsibilities of owning a rental property.
The decision of whether and how to help a child buy a home isn’t always simple, especially if you have more than one child. For this reason, consulting with a financial professional can be important. He or she can help you assess whether it makes sound financial sense to use some of your savings to help your child buy a house. If you decide it does, your financial professional can help you weigh your options and then put your intentions in writing so that you avoid any confusion or resentment within the family later on.