Parents – you’ve made every game and recital, comforted them when they cried, and cheered the loudest when they succeeded. Now that your children have become self-sustaining adults, what’s the best way to continue supporting them? Regardless of how old your kids may be, there’s still a chance they may need assistance when it comes to bigger purchases, particularly when it comes to buying their first house.
Here we describe the three most common ways to help your child get a leg up on home-buying.
Loan. The first way to structure the down payment funds is as a loan. The initial down payment amount would be loaned to the child with a set amortization and payment schedule and the remaining traditional bank mortgage would be taken on by the child. The key here is to have a written and agreed upon amortization schedule and to follow it.
Co-Ownership. The funds for the down payment could also be structured as an investment, or an equity purchase in the new home. The initial funds used for the down payment would serve as the parent’s percentage equity ownership, and the balance would be taken on with a mortgage from a bank by the child and would serve as the child’s percentage equity ownership. With this approach, both the parent(s) and the child would be on the title with their respective ownership percentages.
Gift. Perhaps the simplest approach is to gift your child the money for the down payment with no strings attached. The child would then take on a mortgage for the remaining amount and the parents would not have any equity or debt interest in the home.
Who will take the mortgage interest and property tax deduction? The answer depends primarily on who is paying them. Most CPAs agree that regardless of who is on the title or whose name is on the mortgage, the person paying these expenses takes the deduction. In most cases, the child will be paying them, so they would likely get the deduction. Be sure to confirm with your CPA and explain your specific situation.
Many parents are concerned with equalization of gifts or loans between children. This can be a challenge as often, when one child is ready and able to buy a home, the other child(ren) may not be in the same position. There are several ways to create an equalizing asset transfer, mostly through updates to your estate plan.
Consider spouses. If your child is married, there is another level of planning you might want to consider. Again, be sure to work with your estate attorney to create your plan according to your wishes, but most parents prefer the loaned or gifted amount stay in the family bloodline.
Consider how to title the property. It is worth the small cost of an attorney’s time to ensure proper titling, as it is important to ensure that the asset passes as intended. Often, the home should be owned by a trust, or a combination of trusts.
Above all else, make sure you can afford to help. We understand the desire to help, but remember that your child has more time on their side to save. Before committing to loaning or gifting anything, be sure to check with your financial planner to ensure it won’t negatively impact your retirement picture.