Parents and grandparents often look for ways to provide more financial support to their families. While helping with education costs is one of the most common methods, another question that is being asked more often is: Should I help my kids or grandkids buy their first home?
As with most financial decisions, this question raises more than just financial considerations. There are also emotional and values-driven conversations that go along with it.
To help or not to help?
Many family members want to help the next generation with major purchases so they start off on the right foot. With high student debt and a job market that only recently started to turn around, many young adults have had trouble saving for down payments. This has encouraged a number of parents and grandparents to provide financial support for first homes.
However, family members may also be concerned about becoming “helicopter parents” or that their children will not fully appreciate the responsibility of home ownership if they are simply given money for their homes. Your concerns likely depend on your family dynamics, but if you are worried that your family may not fully appreciate the support, be sure to set clear expectations about how the funds are being made available and under what circumstances.
Understand the why
If you are considering helping your kids purchase a home, take the time to understand why they need the help before you start to write a check.
Is it because they’ve built up a lot of student loan or credit card debt?
In these cases, it may be better to help them pay off these debts rather than buy a home.
Are they poor savers in general?
If this is the case, it may be more helpful to provide financial advice rather than help them enter into a loan they could have serious difficulty paying back.
Or, are your children just having a hard time saving for a down payment?
This can easily happen with a job market that has been sub-par for many years. With job and wage growth turning a corner, your family may just need some help upfront but be in a good position for long-term success.
If you choose to provide financial support for the purchase…
The first decision is to determine how much you can give. It’s critical to examine your own finances and speak with your financial advisor about what you can reasonably afford. Then, you can consider your options: Is this a loan, an outright gift, or a full purchase?
If you choose a loan:
Be sure to properly document it with a legal contract that describes the terms. Otherwise, the IRS may consider this as a gift. Keep in mind, the loan may impact your child’s ability to qualify for a mortgage, especially if they have high student debt.
If you gift the money:
Consider the tax implications. Today, the gift tax exclusion is $14,000 per year per individual. Gifts above this amount may have negative tax implications. Also, some lenders take a hard look at how long the funds have been in your child’s possession, so consider providing the gift several months prior to the actual purchase.
If you purchase the home yourself as an investment property:
Often, your children then pay rent. You can set up a rent-to-own agreement, you can sell the home to your children (or another party) when they are ready, or you can keep the home for investment income. There are, of course, tax consequences to evaluate when looking at this option as well.
If you want to help your kids or grandkids buy their first homes, there are a number of things to consider from the why to the how. If you would like to discuss your children’s or grandchildren’s mortgage needs, we can help. Reach out to your relationship manager or click here to request a consultation.
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First Western Trust cannot provide tax advice. Please consult with your tax advisor on how the information contained within may apply to your specific financial situation.