It is possible to help your adult children buy a home.
The economy has been declining in recent years.
Inflation and interest rates are both high.
Consequently, buying a house is challenging for many individuals, couples, and families.
According to a recent Kiplinger article titled “Four Ways Parents Can Help Kids Be First-Time Home Buyers,” parents can provide support to adult children trying to purchase a home in a market with unfavorable conditions for the buyer.
How can parents help their children buy a home?
Use an intrafamily loan to lend them the money.
Your adult child may not meet income and asset requirements from the bank.
Parents can choose to serve as the lender with an intrafamily loan.
Without taking certain steps, this could be considered a gift and have tax implications.
To avoid these tax liabilities, you should make the loan formal by charging a minimum interest rate called the applicable federal rate (AFR) and including a promissory note.
Use an intrafamily loan in another way.
Parents do not have to provide their children the entire home purchase amount with an intrafamily loan.
Instead, you can use the method to grant funding strategically.
Your children may be unable to pay the full 20 percent down payment for the home.
As a result, they would be subject to purchasing costly mortgage insurance.
You could provide an intrafamily loan to cover the rest of the down payment to help your child avoid this additional fee.
As a lender, the parent would have to report interest earned from the loan for taxes.
Give money as a gift.
Some parents may prefer to gift the child money to help buy a home.
To do this, they can use the annual gift tax exclusion.
What is the annual gift tax exclusion?
The annual gift tax exclusion means an individual or couple can gift a certain amount of money in a year to any individual without triggering tax consequences.
When the annual gift tax exclusion is not used, it does not transfer to the next year or accumulate.
Instead, it is lost.
What is the current exclusion amount?
Individuals can give up to $17,000 per recipient.
Couples can give up to $34,000 per recipient.
These gifts can be used as either outright gifts of cash or as loan forgiveness.
How is this possible?
Parents can use the balance of the gift exclusion each year to forgive some of the principal on the promissory over time.
Although you could also forgive a greater amount, this would mean you would use some of your lifetime gift exemption.
The lifetime gift exemption is cumulative.
Although the current gift and estate tax exclusion amount is $12.92 million per person and $25.84 million for married couples, the amount is set to decrease to $5 million for an individual and $10 million for married couples indexed for inflation beginning in 2026.
Co-sign a loan.
The final way parents can help adult children buy a home is to be a co-signer or guarantor for the loan.
If your child has not established good credit, serving as a co-signer can help your child receive better loan terms.
The potential problem with this method is you could be obligated by the contract and terms of the loan if your child does not make timely payments.
Ultimately, parents are not obligated to help their children buy a home.
If they choose to do so, they have several options regarding levels of involvement and support.
Reference: Kiplinger (June 27, 2023) “Four Ways Parents Can Help Kids Be First-Time Home Buyers”