There are many good reasons for a parent to help a child purchase a home. Parental assistance can help a child settle down faster than he or she might be able to on his or her own. While some parents speculate that helping a child purchase a house will only make the child more dependent, the opposite can actually be true!
In tough economic times, assistance can help a child break free from the rental cycle and start building some equity and kick-starting an adult life that they might not be able to achieve otherwise. with interest rates at a historically low level, it makes sense to help a child take advantage of the situation.
Depending on the parent’s financial situation, the child’s level of responsibility and maturity, and the relationship between the parent and child, there are various strategies that can be taken to help a child to purchase a home.
A parent can:
- Purchase a home outright to give to a child.
- Enter into a shared equity agreement with the child.
- Give the child financial advice and guidance to get a loan on their own.
- Help make sure that the child doesn’t fall prey to bad deals or predatory lending.
Talk to a Lawyer! I hope this will give you parents a better understanding of the issues involved in purchasing a home for a child but this is NOT a substitute for specific, tailored advice from a licensed attorney or financial planner.
- Child wants to purchase home but Parents worry Child is not mature enough to handle a home loan seriously.
- Parents have lawyers draft up a loan agreement. They lend Child the full amount for a 20% down payment, but have a plan in place and a schedule for repayments. They don’t actually intend to take Child to court if missed payments, but Parents are happy to have the loan officially set up in a legal document.
- Child is ready to purchase a house and has located the perfect one. Unfortunately, Child does not have a full 20% down payment amount.
- Parents offer to just give the money to make up the difference, but Child is afraid that they will ultimately use the gift as emotional leverage. Child can agree to let Parents loan the difference, but only if they draft up an agreement that clearly states the expectations of the loan and establishes a repayment schedule.
- Child is getting married and would like to purchase a home. Child’s parents are well off and would like to give them the money for a sizeable down payment. However, they want to do it strategically so as not to increase their eventual exposure to estate taxes. Parent’s also have other children and don’t want to reduce their eventual shares or the amount they can place in a trust tax-free.
- Check laws on gifts! You usually can gift $XXX per year without it counting against the lifetime. Parents now can gift Child $XXX apiece this year, and another $XXX each after Jan. 1, for a total gift of $XXX that will not count against their lifetime limit.
- Child have enough to purchase a very small home. They are excited, but it is just not big enough to start a family. Parents would like to help out with the down payment on a larger place, but don’t have enough money to spare to just give the cash.
- Parents can go in on a shared equity financing agreement where they split the costs for a home purchase. Child ends up getting a much larger house with a rental unit. Parents split the costs down the middle and then Child rents out Parents half of the house with the rental unit and pay the difference. Parents can deduct their expenses as well as the mortgage interest, the property taxes, insurance, maintenance, and utilities on income tax returns.
- Child would like to buy a condo, but cannot qualify for a large enough loan. Parents would like to help but do not have the money on hand to do it.
- Parents are sympathetic so they cosign on the loan so that Child will qualify for an amount large enough to pay for the new condo
- Child is in medical school and plans to ultimately practice medicine in the same city. Child would love to own a home but cannot afford to while in school. Parents are paying Child’s rent and feel like it is money wasted. They’d love to just buy a house and give it to Child, but want to avoid gift/estate tax implications.
- Parents can end up purchasing a home in the city where Child lives, one with an extra bedroom that they can stay in when they visit. Every year, they give Child a percentage of ownership in the house until Child eventually owns the entire home. CHECK GIFT TAX LAWS
- Child is in mid twenties and is set on purchasing a home and has explored some options and thinks that the best route is to get an adjustable rate mortgage on a house and then flip it before the rate goes up and use profits to buy another house.
- Parents want to help out, but don’t want to finance a bad decision. Parents don’t really have that much money on hand anyway. Parents can decide that the best gift that they can give Child is one of knowledge. They sit down and explore options
As parents, you will always be there for your children no matter how old they get or at least try to be whether financially, emotionally or physically. I can say that about my mother at least but some parents can easily get taken advantage of by lending more than they should or not getting paid back, which can lead to resentments.
While aging, there is also the real danger of not having enough for retirement or having other, future financial problems due to the one silly kind gesture. Not firmly declaring and describing any gifts or loans in legal documents can lead to later family infighting when it comes time to settle the parent’s estate, if any.
These aren’t reasons to not help your child out, though, just things to think about before you get too deeply into the process. It can be very rewarding for you and your child. Whatever route you take, work with your lawyer and tax professional to strategize efficiently to get the most benefit for all parties involved.
Blackrock Investments and Finance, Inc.
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