Wealth Planning Insights

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High home prices, high interest rates, low inventory, and tough competition have made many prospective buyers feel that home ownership is out of reach entirely or they can no longer afford the home they want.

This environment has prompted new ways of approaching a potential purchase and led to more conversations with clients about helping a child buy a home. There are several potential ways parents can help but only after addressing the first and most important question:"Do we have enough to help at all?" (As Keith discussed on the previous page, our Capital Sufficiency pillar is an excellent tool that can be used to find the answer.) Once that critical question is addressed, consider the following:

Outright Gift

If you are comfortable gifting money, you could give enough cash to your adult child to buy the home outright, assist with the down payment, or help with making mortgage payments. Depending on how large the gift is and how it is structured, you may need to file a gift tax return. You may also be asked to confirm that it is a gift and not a loan so as not to interfere with mortgage underwriting.

Intrafamily Loan / Landlord

In lieu of an outright gift, you could become the “family bank” and loan the money to your adult child. This works best when financing the entire purchase. As an alternative, you could buy the house and then rent it to your adult child. In both cases it is important that you properly document any loan or rental agreement and associated tax reporting on income.

Be On The Hook

If your adult child is struggling to meet mortgage loan underwriting requirements (e.g., they are self-employed), you could co-sign the mortgage or co-borrow. The co-signer is on the mortgage to guarantee the loan for the borrower. The co-borrower has equal responsibility to pay the mortgage.

Gift or Sell the Family Home

If you find yourself in a position of wanting to downsize and your adult child wants the family home, you could sell it or gift it to them. In both cases, it is wise to hire a real estate appraiser to determine and document the fair market value of the home, as well as hire an attorney to prepare and file any required paperwork to properly document the transfer of ownership.

Each of these has its unique advantages and disadvantages along with the potential impact on your taxes (income, gift, and estate), family dynamics, liability, financial independence, and estate planning.

Helping an adult child is an admirable goal and a big financial decision to make. We encourage you to contact your Wealth Advisor if it is something you are considering.

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