How to Help Your Child Buy a First Home
This article comes timely in my own life as a couple months ago my wife, Ruth, and I decided it was time to help our 27 year old son, Grant, who has been working hard and saving money, get out on his own with a small condominium. Selfishly, I will miss him around home because he is strong-like-ox, lovable, and kind. But like so many young adults he needs help with his first purchase.
Grant has autism, which limits his earning capacity. Like Ruth and me, sometimes parents want to assist with the first home because, on their own, the child is at a disadvantage. But often it’s because the parents want to make an early impact with some of the wealth they have accumulated. Either way, there are three main considerations when helping a child purchase a home: The manner of the gift or transfer, how title is taken, and liability.
Giving a Direct Gift & Avoiding Gift Tax
The simplest funding is a direct gift to the child. The money should be given at least two months ahead of a mortgage application so that the balance will appear in the child’s account for at least that long. Your son or daughter then uses those funds for the down payment to purchase the property. He or she may qualify for the mortgage on their own. If they do, your part is done.
If your child is married, then consider carefully whether or not to give to the child and his/her spouse. You should not assume that the marriage is solid just because the couple is hoping to buy a home together. Also never assume that if the marriage broke up the in-law is going to be grateful and give their part of the gift back to you. It’s simply unlikely to happen. However, adding the spouse may make gifting the amount necessary to make the purchase possible. To do so doubles the size of the gift that is free of possible gift tax.
Here are a couple of tips on the gift tax:
- The annual exclusion for gifts (above which you have to file a gift tax return) is currently $15,000 per giver/per person you give to. So, for example, each parent can give $15,000 to a child and another $15,000 to the child’s spouse, for a total of $30,000 from each parent, and $60,000 from both parents to the child and spouse together. This can be repeated in subsequent years if desired.
- If you exceed the $15,000/$30,000/$60,000 numbers, it’s not the end of the world. You can give away a whopping $11.4m over your lifetime currently, not including the annual exclusions, before paying a gift tax. But a federal gift tax return should be filed if you exceed $15,000 per donor/per donee.
- You can spread the down payment gift over a couple of years if you have the good fortune of planning this toward the end of one year and the beginning of another.
- If you are co-buying and will be on the title then you are not making a gift.
Co-Owning the Child’s Home
If a parent is going to make an investment in the property with a child who is single, then the title is probably going to be taken together as joint tenants with right of survivorship, i.e., whoever lives longer owns the property. You can also go in as tenants in common with your fraction being your property and the child’s being his or hers. This essentially makes you partners.
Say you put down the 20% needed to make the purchase. You can stay in as a 20% owner as long as you would like, and let your “investment” rise (or fall) with the market. You can make a gift of the 20% up front, later, or not all. A gift would be accomplished by signing the deed over to the child. If you are only supplying the down payment and the child is carrying the mortgage, then the 20/80 fraction will never change. If you are sharing the mortgage or other expenses, then you may need to work out an actual formula for tracking ownership, but you can also simply agree on a fraction and leave it at that.
Providing a Loan
Instead of a gift or co-ownership, you can give a loan to a child. The loan, by definition, is not a gift or an investment in the property, but it can combine aspects of all three methods. For one thing, if you do not charge interest, you must document that you are making a gift of the interest. The rules and the calculations quickly get complicated if you try to finesse the situation. The easiest thing is to charge – and report as income – the interest.
If you have to foreclose the loan someday, then you are an investor in the property whether you first intended to be or not, and will be liable for all the costs associated with the property, like a co-owner. There are some safe harbors for loans under $10,000 and under $100,000 but there is not enough room here to elaborate.
Effect on Credit
If you’re on the title you’re also going to be signing the mortgage (and usually the promissory note, which is the real debt instrument). Default, and you’re on the hook, and there goes your credit rating. On the other hand, ownership can provide the ease of directing what happens with the property at death. And, having the child on the mortgage (along with you) should improve his/her credit rating.
Joint tenancy and being on the mortgage is what my wife and I decided to do. This keeps it easy and allows us to monitor the situation. My son is not on SSI or Medicaid, but if I had those complications, then I might want to have purchased the property all by myself, without his credit. If my son were to pass away, the property would come to me as a surviving joint tenant. When I die, Grant gets it. Later, we can do some trust planning if we see fit.
Liability
As for liability, if you are on the title with your child, then you will be covered by standard property and casualty insurance. In my case, the occupant is my son, so he is the insured. I am listed as an additional insured. This is good in case there is a slip and fall on the property. However, the property is also now my asset and may be subject to my liabilities.
My son will have a Massachusetts Homestead on the property (either statutory or declared) to protect his ownership from creditors. But that only covers his 50% of the equity. If a creditor of mine were looking for an asset to collect against, my son could lose his home, theoretically, at least. The consolation is that my equity in Grant’s condo would make a very small and unfitting target for any hypothetical creditor of mine.
The Beauty of an Agreement
There is joy to be found in doing significant lifetime gifting to children and grandchildren. Most of us parents will never stop doing so when we can afford it. If we are so blessed, even modest gifts can help people get started in this expensive environment we live in. That said, there’s no substitute for a sound agreement to make the arrangements clear.
Having a co-ownership agreement should, among other things, make it clear in writing that either party can terminate the relationship if it is not working out for some reason. Also, it’s not a bad idea to have an understanding about how each and every cost is going to be born, even if it’s only an exercise to make sure you haven’t missed something.
Luckily, co-ownership agreements are my thing! Here is a sample co-ownership agreement.
Email me, Tim, if you would like to learn more about a co-ownership agreement, or if you need any other advice relating to how you can help your child purchase a home.
Read Gifting to Children as Part of Your Estate Plan to learn all of the ways you can give to your children.
