Helping your children buy a house
As home prices rise, many young homebuyers need assistance to get into the market. More than a quarter (27%) of homebuyers between the ages of 22 and 29 funded their down payment with cash gifts from family, according to a 2020 report from the National Association of Realtors (NAR).
Parents have a number of options when it comes to helping their children purchase a home, but various arrangements have tax and legal implications.
Here are some possible scenarios:
Gifting a down payment: In 2021, the gift tax exclusion is $15,000 per recipient, per taxpayer, per year. That means that you and your spouse could give your child and their spouse $60,000 to cover a down payment (2 parents x 2 recipients x $15,000).
If your children are buying in a high-priced housing market, you could give another $60,000 in the following calendar year, for a $120,000 down payment.
Lenders will typically allow a down payment to come from cash gifts, as long as the money is adequately documented and tracked, and other conditions are met. “Seasoned money,” that is a gift that has been in a borrower’s account for more than two months, may require less stringent gift documentation.
You can choose, of course, to make a gift in excess of the $15,000 per person exclusion provided you file a gift tax return. Any gift in excess of the annual limit will reduce your lifetime exemption (currently capped at $11.7 million) accordingly.
If you are concerned about protecting the value of your gift from a future divorce or separation, consult a lawyer in your state. One way to do this is through a “deed of gift” that could shield the gift from being regarded as family property in a divorce proceeding.
If you have multiple children and are concerned about treating them all the same, you could adjust your will to gift your other children an equal amount at the time of your death.
Co-owning or sharing equity: Instead of making an outright gift, you can make an agreement in which you co-own the property as joint tenants while your children live there and pay all expenses. That creates liability exposure for all owners, and if any party has a creditor, the house could be in jeopardy.
Alternately, you can establish a shared-equity mortgage. In such an agreement, you (the parents) share in the equity and appreciation on the property and are promised a portion of the profits when your kids sell the home. Possible complications here include calculating each party’s share of appreciation, tax write-offs and anticipated resale timeframes.
Loaning a down payment: According to the NAR study, 6% of young borrowers funded their down payment with a loan from family or friends. It’s important to be honest with a lender about whether down payment funds are a gift or actually a loan to be repaid. Mortgage loans are based on the borrower’s debt-to-income ratio and misrepresenting a loan as a gift would be considered mortgage fraud.
If you choose to loan your child the money, establish clear terms in writing, spelling out an interest rate and repayment schedule. This documentation is necessary for income and gift tax calculations and deductions.
