The following article is from the latest edition of LGA’s financial newsletter, “What Would Jeff Do?,” written by Jeffrey Levine, CPA, MST, our Director of Financial Strategies. If you have a general financial question for future newsletters, please submit them to Jeff. Enjoy this article? Subscribe to the newsletter here.

Your child is ready to purchase a new home; how can you assist?

  • Co-sign a mortgage (and deed) to help with loan qualifications or joint purchaser.
  • Gift funds for down payment or large amounts to reduce loan needed.
  • Be the bank – advance funds to your child, who then makes monthly payments to you instead of a bank.
  • Look for a multi-family house and be a co-investor.

Federal Estate Tax Annual Exclusion:

You can gift $19,000 per year to anyone you wish by using the Federal Estate Tax Annual Exclusion (such gifts are non-reportable, do not impact your lifetime Federal Estate Tax Exemption), and are not taxable to your child. Depending on your family situation, your spouse can also give $19,000 per year, and if your child is married, you can both do the same to their spouse as well.

Potential Complications of Co-Ownership and Co-Borrowing in Real Estate:

  • What if something happens and you need access to funds? Would you need to sell the property out from under your family?
  • What if your child relocates and wants to sell, but you don’t?
  • What about taxes – your child qualifies for an income exclusion for gains on sale, but you don’t.

Jeff’s Recommendation:

First,  discuss finances with your child. Make sure you both understand what is affordable and what is desirable.

Consider a budget for the child – make sure you account for all usual non-discretionary and discretionary expenses. What is their net after-tax income, and will the real estate deductions reduce their tax burden?

If the finances show that the property is affordable, Jeff recommends keeping things simple. Being the bank for your child is great, but it could lead to family challenges, it is recommended only if you have enough funds elsewhere to avoid issues. Co-ownership could be great as real estate usually increases in value, but again, it could lead to disagreements or other issues.

Jeff recommends transferring funds to your child (only what you can afford) and either considering such transfers gifts or, if you need the money for your own future planning, call them loans. When you loan your child money, that might cause an issue with a mortgage lender, so making a gift simplifies things. It also helps to make the gift several months in advance of a loan application, as banks tend to ask what the source of your child’s down payment on the property was. It is smoother to have the funds readily available early on. If you do expect the money to be paid back, you and your child can agree that is the intent, but calling the funds a gift helps to qualify for their mortgage if needed.

LGA’s Commitment:

Helping your child purchase a home can be a rewarding yet intricate journey. At LGA, we’re committed to guiding you through every step of this process with ease.

For advice and to discover the best strategies for supporting the homebuying experience, contact us today. We’re dedicated to helping you make informed decisions that will benefit your family’s financial future.