You want the very best for your children. The finest education. The perfect job. The safest and most comfortable place to live.
For many parents of burgeoning adults, watching their kids go through the hassle of trying to secure a first apartment or scraping together enough cash to pay the rent from month to month can be a little painful.
If you can afford to do so, it may be tempting to step in and offer to buy them a place. That way, you’ll know they have a good place to sleep every night, and the financial benefit they gain can help them save for other important expenses, like going back to school or saving for retirement or socking away cash to start a family someday.
Maybe you’re thinking about purchasing a pied-a-terre that can double as a residence for your children so long as they need it. Maybe you want to give them the gift of a home now, to reduce your estate taxes later on. Maybe you’d like to help your kids buy a home on their own terms, helping them out by giving them a loan but not outright gifting them with an entire house.
Whatever the case, you’re not alone. According to Kiplinger, 26 percent of first-time homebuyers received a financial gift towards buying a home, and another 6 percent received a loan from someone in their family.
Yet there are many potential pitfalls to helping out those you love most: You don’t want to inadvertently hurt your or your children’s finances. For example, a loan increases your child’s total debt load and could hurt their ability to get a mortgage. And if you cosign a mortgage, your credit score could take a hit if your child doesn’t pay on time.
The good news is that there are many ways to help out. Here are some of the options, so you can choose the one that’s right for you and your family:
Buy the Home as an Investment Property
Many adults with grown children are ready to rightsize their homes. Some might opt for something smaller and easier to maintain, but that doesn’t mean you have to. In some cases, it might make sense to trade up to a larger home.
Start by thinking about what this home will be used for, and how you and your family will grow into it. For example, you might want to buy an apartment where your grown kids can live. Or perhaps it makes more sense to look for a house with multiple apartments so your kids can live in one and rent out the others, leaving room for other family members to come and go over the years to come.
If you decide to treat this purchase as an investment rather than a gift, it’s especially important to think about options for renting out the space when your kids move out. Plus, having a good grip on the home’s intended use will influence the parameters of the home you choose in the first place.
If you are expecting the home to be populated by your grandkids (or renters with children), for example, then you’ll probably want to choose a place in a good school district. If you’re planning to help a sibling or other relative who doesn’t have—and doesn’t want to have—children, then that changes things.
Be a Mortgage Lender for Your Children
One way to gift your children with a place to live is to essentially act as the mortgage lender for your children. You might not want to own the new home in your own name, as doing so can increase the size of your estate and possibly result in estate taxes down the line.
If you want the title to be in your kids’ names, you can loan them the money to pay for the house and let them pay you back. Presumably, you don’t need to make a large profit off of the loan so you can set lower interest rates for your kids than they’d be able to get commercially.
Another benefit for your kids is that they’ll get to enjoy the mortgage interest tax deduction (note that they’ll get the tax deduction, not you). Importantly, though, don’t let your kids off the hook. They do need to pay you back at the applicable federal rate, otherwise the IRS could get suspicious.
Make It a Gift
Another option is to contribute cash for the down payment. The main benefit here is that you can circumvent the gift tax and reduce your estate taxes down the line. According to Forbes, the 2015 limit on gift-giving is $14,000 before you’re taxed, but you and your spouse can each contribute that much.
If your adult child is married, you can contribute that amount to your kid and your kid’s spouse, for a grand total of $56,000 in tax-free gift cash (if you and your spouse both give the max to your child and your child’s spouse). If you do this right around the new year, you can give the annual max at the end of December, and then give the annual max again for the next year at the beginning of January.
If you go the gift route, draft up a “gift letter” that all parties sign to verify when the transfer took place and that you don’t expect repayment. That way, if your child tries to get a mortgage, lenders won’t have to worry that this gift is actually a loan in disguise. A mortgage lender will want to look at the source of these funds, so make sure you maintain a paper trail and finish the money transfer to your child at least 60 days before they close on the house.
Become a Shareholder
Yet another option is to set up a shared-equity deal in which you provide a down payment in order to get a 50 percent stake in the house. When the house is eventually sold down the line, you’d presumably get your money back, as long as the home sells for enough.
Remember the Human Element
Money isn’t the only consideration. You should also think about the emotional side of giving huge gifts to your kids: You want your children to understand financial responsibility, and don’t want them to underappreciate their home simply because they didn’t contribute toward it.
At the end of the day, bear in mind that your goal is to help your children—and to maintain a strong relationship with them. When family and money mix, there’s the possibility that all sorts of unseen complications will crop up, including issues around entitlement, expectations and what kind of home your children actually want to live in.
Every time you make a decision, ask yourself: “What will bring us closer together as a family, now and in the future?”
This information is intended to be general in nature. The Hartford does not provide tax or legal advice. Please consult a tax or legal adviser to review your particular circumstances.
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