June 03, 2022
Helping Your Child Buy a House
By Sylvia Salguero, Financial Advisor
If you are looking for a way to help your children buy their first home, there are several options available. Determining which one is best for your circumstances depends on multiple factors, primarily on how much you are able to provide and what level of control you would like to retain.
Here are a few options to consider:
1. The most obvious option is to give them a gift of a certain sum of money. Here you have no additional involvement or responsibility regarding their home purchase, or any decision they make in the future, whether they keep it, sell it, or gift it. If the amount you give them exceeds the $16,000 gift tax exclusion (which changes periodically,) you need to file a gift tax return for the amount given.
2. You lend them the money they need. (For a down payment, for example.) This is not a gift; you expect them to repay you. The amount can be secured with a mortgage on the home your child buys, or unsecured, by getting a promissory note, which is an enforceable, written commitment that you will be reimbursed. This is not a gift, so the loan must bear interest of at least the applicable federal rate. If you later decide to forgive this loan you may do so, as a gift in your lifetime, or at death through your estate plan.
3. You create an irrevocable trust for your child and give them a gift or a loan as above to that trust, rather than to your child directly. By using the irrevocable trust, you have more control over the way the gifted funds are used in the future. In the case the child is not able to manage the finances involved, another trustee can be named to handle this responsibility. The irrevocable trust can also protect your child from a potential future divorce or provide other creditor protection in the event of personal liability.
4. Another option is joint purchase. You are able to acquire an ownership interest in your child’s home, depending on the contribution you make to the purchase price. In this instance you participate in the appreciation of the home, according to the percentage of your contribution. This could be an advantage if you count on this money toward your retirement or other goals, (assuming the house value goes up,) or it may be a disadvantage if your intention is to ultimately gift your share to your child and it is now a much higher number. In the event that your child plans to obtain a mortgage and you are willing to sign as a co-borrower, your good credit may obtain a more advantageous term. You retain some control, although you are also liable in case your child does not make the required payments.
5. Finally, you can purchase a home outright and allow your child to live there. This works when you want to retain complete control of the home. It also comes with the full responsibility of home ownership. You have the ability to set terms and conditions to the child’s use and occupancy of the property, such as do they pay rent? Are they responsible for maintenance and repairs? It is best to consult with a tax advisor whether rent free use of the property is considered a gift. You may also want to address this in your estate plan; how should this asset be treated at your passing? Let your child know and understand their responsibilities for when you are no longer here.
If you live in California, be especially careful which of the above options you choose, as some of them can result in significant increase in property taxes, due to reassessment to fair market value if your interest in the home is given or sold to your child. The recent Proposition 19, which became effective in 2021 eliminated the exclusions that could prevent this adjustment. It is best to fully understand all the implications of the options above before choosing one.
For a comprehensive review of your personal situation, always consult with your legal or tax advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.