In today’s market, young first-time homebuyers may find themselves weighed by student debt, high home prices, and stringent mortgage requirements from most lenders. As a result, parents are now ste💯pping 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.

Ways to Help Your Child Buy a Home

According to a 2023 National Association of Realtors report, 22% of homebuyers ages 24 to 32 (younger millennials) received downpayment help in the form of a gift or a loan from a friend or relative.

You can help your child buy a home in many ways. For example, you can simply buy a home outright in your name and rent or give 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’ pওroperty.

Other possibilities include:

• Provide all or some of the 澳洲幸运5官方开奖结果体彩网: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 form.

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 澳洲幸运5官方开奖结果体彩网: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 r♑eport your gift on Form 709.

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 澳洲幸运5官方开奖结果体彩网: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 posi🙈tive side, a properly record🌃ed loan allows the child to maximize deductions at tax time.

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

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 澳洲幸运5官方开奖结果体彩网: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 nꦉame on Form 1098.

Building Equity and Long-Term Investing

Helping with mortgage payments might make more fi😼nancial 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 hom༺e for three to five ye🔯ars 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 f💧rom 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 澳洲幸运5官方开奖结果体彩网:Federal Housing꧑ Administration (FHA)–backed loans.

“The difference between a primary [home] mortgage and an investment-home mortgage is significant,” said Linda Robinso✨n, 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 澳洲幸运5官方开奖结果体彩网:credit rating is hurt just as much as the child’s. As a cosigner, the parent is ultimately responsible for the debt.

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 advan♛tages. 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 annual𝓀 gift tax exclusion, could diminish the tax burden in the future.

The property is an investment that might ultimately help the parent break eve⭕n 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 stanܫdard of l🤡iving in retirement as they help their child buy a new home.

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

Finally, there may be emotional consequences to hel✤ping 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.

The Bottom Line

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