In recent times, the traditional path to homeownership has experienced a shift. Parents are increasingly extending a helping hand to their children as they set out to purchase their first homes. According to the National Association of Realtors, a significant 25% of homebuyers aged between 22 and 30 have relied on family and friends to fund their down payments, with an additional 5% borrowing from close relatives. If you’re contemplating supporting your child in this life-changing decision, here’s a guide to your options.
1. Outright Gift: The simplest way to assist is by gifting your child a sum of money. Once the gift is made, the decision on how to utilize it lies with your child. It’s important to note that if your gift surpasses the annual gift tax exclusion, a gift tax return must be filed. However, taxes are only due if you’ve surpassed your lifetime gift tax exemption.
2. Loaning the Money: Instead of gifting, you can opt to lend your child the funds. This approach allows you to offer support without permanently parting with assets, as you anticipate repayment. If you follow this path, it’s crucial to draft a promissory note, which formally recognizes the loan. To avoid tax complications, the loan should have at least the minimum interest rate set by the IRS. If the interest payments aren’t met, there’s potential for the IRS to view this as a gift.
3. Establishing a Trust: For those desiring more oversight on the use of funds, setting up an irrevocable trust is an avenue to consider. By directing funds to the trust instead of your child, you can set terms consistent with your financial objectives and considerations. Trusts can offer protection from creditors, potential tax advantages, and can serve to ensure that property remains separate from marital assets.
4. Joint Purchase: A collaborative solution might involve co-owning property with your child. In this case, you would maintain a stake in the property proportional to your investment. However, this approach has its own set of complexities, like allocating responsibilities and navigating potential disagreements. Having clear terms from the start, preferably documented, is advisable. In addition, co-signing a mortgage links your credit profile directly to your child’s ability to make timely payments. Any missed or late payments, or defaults, can negatively impact both your and your child’s credit scores. It’s a joint financial responsibility that requires careful thought and consideration.
5. Purchasing a Home for Your Child: If you prefer maintaining full control, you can purchase a property and have your child reside there. As the property owner, all decisions related to maintenance, residency terms, and potential rent fall to you. Do seek professional advice regarding potential gift implications if your child isn’t paying rent.
While aiding your child in their quest for homeownership is commendable, it doesn’t come without challenges. There’s the possibility of credit implications, loss of investments, or even familial disputes. It’s also worth mentioning that if children have a strong credit history, co-signing alongside gifting may be a viable approach. It’s crucial to remember that every financial decision, especially those intertwined with emotions, should be made judiciously. While assisting your child in securing a home is a noble endeavor, safeguarding your financial well-being remains paramount. Engaging in such arrangements professionally, seeking expert consultation, and fostering open communication will ensure a seamless homeownership journey for all parties involved. At Moran Wealth Management®, we’re here to help navigate the complexities of assisting your children in homeownership with informed and personalized financial advice. Contact us to explore tailored solutions that balance both your child’s aspirations and your financial well-being with clarity and confidence.