Today we dive into a topic that's close to many hearts: assisting adult children in their journey to buy a home. The dream of homeownership often transcends generations, and as parents, it's only natural to want to support our children in achieving this milestone. Join us as we explore the legal and financial considerations involved in aiding your adult children on their path to homeownership, ensuring a smooth and secure transition.
The Millennial generation has come of age, and Generation Z is following right behind them. Kiplinger’s recent article, “Four Ways Parents Can Help Kids Be First-Time Home Buyers,” discusses how parents can help their children buy their first homes in this landscape of high real estate prices and rising interest rates.
- Lend them the money as an intrafamily loan. One strategy is to act as your children’s “bank” and lend them the money. This is known as an intrafamily loan. By serving as their lender, you skip their having to meet banks’ asset and income requirements. However, to avoid gift tax implications, parents should formalize the loan with a promissory note and charge a minimum interest rate called the applicable federal rate (AFR).
- Use an intrafamily loan in another way. Another way parents could help by using this intrafamily loan strategy is to provide strategic funding when needed. A borrower on a mortgage who doesn’t put down a 20% down payment would likely need to purchase mortgage insurance, which could be expensive. So, instead of the child incurring that additional fee, the parent could issue an intrafamily note for the gap amount in the down payment. Regarding tax consequences, as the lender of an intrafamily loan, the parent would have to report income on the interest earned on the note.
- Give money as a gift. Parents may want to give their children the money toward the home. If so, they can use a gifting strategy called the annual exclusion gifting. Each year, an individual may give up to the annual gift tax exclusion amount to any individual without tax consequences. That amount is currently $17,000 per year and, if left unused, can’t be carried over to the following year. The amount is available per recipient, so if you have more than one child, you could give up to $17,000 yearly to each child. If the parent is married, both spouses together could gift $34,000 per year for each child. This could be used as an outright gift or in the form of loan forgiveness.
Parents may also opt to forgive some of the note's principal over time by utilizing the balance of the annual exclusion gift yearly or, for a larger amount, the lifetime gift exemption. But unlike the annual exclusion, the lifetime gift exemption is cumulative from year to year and applies to all recipients. The federal lifetime gift exemption is now $12.92 million per person or $25.84 million for a married couple. Still, it’s scheduled to decrease to $5 million (or $10 million for a married coupled), indexed for inflation, starting in 2026.
- Co-sign a loan. Another way a parent can help is to act as a guarantor or co-signer on a loan. So, a parent can help a child who may not have established credit and, in some cases, may also help secure better terms on the loan. But if the child fails to make timely payments, the parent could be contractually obligated under the loan terms.
Supporting your adult children in buying a home is a significant and meaningful endeavor that requires careful planning and legal guidance. At Vick Law, P.C., we understand the importance of family and are here to assist you in navigating the legal intricacies of such transactions. Whether it's through gifting, co-signing, or other methods, we can help you explore the best options that align with your goals and resources. Contact us today to discuss your unique situation and how our experience in estate planning and elder law can make the dream of homeownership for your children a reality.
Reference: Kiplinger (June 27, 2023) “Four Ways Parents Can Help Kids Be First-Time Home Buyers”