It’s time for your children to own a home. What’s the best way to help my child buy a house?
There are a lot of different ways to help your child when it’s time to start shopping for a home.
Regardless of which option you chose, you should craft a structured agreement that spells out your expectations and your child’s responsibilities right at the beginning. Make things as businesslike as possible and set up realistic payback terms.
There should be an agreement, is it a gift or a loan? Is it going to be a disbursement from the child’s ultimate inheritance? Getting these issues clarified upfront can help:
Prevent sibling squabbles after your death. Make it clear how the gift or loan will impact the break-up of the estate. There might be siblings who didn’t get such a loan and want it as added inheritance instead.
In case of divorce, especially if the loan is meant for the child and not the in-law. If it’s not clear, the soon-to-be ex-spouse could be a beneficiary.
Keep the long-term relationship with your child intact. Make it clear what will happen if payments aren’t made, how the tax credits will be accounted for, and who will be on the title. What you don’t want to do is get into a situation where there is strife or disagreement down the road.
What Are My Options for Helping My Child Buy a House?
Loaning Money to Your Child - Sometimes parents want to help their child be more responsible. Giving them a loan to repay can give them a sense of financial responsibility. It also gives them the tax advantages of owning a home.
On the downside, this loan will add to the child’s debt burden and can hurt the chances of qualifying for their own mortgage.
Gifting the Down Payment – Lenders typically allow the down payment on a primary home to be made up completely or partly with cash gifts as long as the other requirements are met. For example, there might be programs that allow the entire 3% down payment to come from gifts.
Start looking into all the programs available when you are considering helping with a down payment gift. Even with the gifted down payment, your child still must qualify for a mortgage. That means the child has to have enough cash on hand, a steady job, a stable income, and good credit.
Co-signing or Investing in a House – This option allows you to benefit from the price appreciation of the house and any rental income that might be coming in. You might buy a house that is big enough for roommates or buy a multi-property unit. If the roommates are paying rent, you might be able to take the rental-related deductions while letting your child live there rent-free.
Purchasing Property for Your Child – Keep in mind the gift tax here. Rather than just purchasing a house and giving it to your child, which would incur a rather large gift tax, you might want to structure it as a low-interest rate loan and then forgive what is allowable per year.
If you buy a second home and let your child live in it you might be able to take tax deductions on the property taxes, mortgage interest, repairs, maintenance, and structural improvement. Because you are renting to a family member certain rules will apply (for example, you can’t deduct the losses a landlord could). If your child pays no rent it is considered personal use of the property and rental-related deductions aren’t allowed.
Set Up A Trust – You could fund the trust with a mortgage and the house be an asset within the trust. Your lender could help you structure the loan and payment terms and generate monthly statements and tax returns. The money has to be sourced, tracked, and documented. This kind of structure can help with numerous tax issues.
Whatever you decide, make sure that you speak to your Tax/Financial professional beforehand to make sure the help is best served and works for you and your child.