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Friday, October 20, 2023

Should You Help Your Kids Buy a House?

It might be a great idea for parents to help their child purchase a home, but there’s a lot to consider before making the leap.

Do you have children or grandchildren who could use a little help getting a home? It’s a common scenario with the current environment of high interest rates, high prices, and few homes on the market. A parent or grandparent may have the resources, and the will, to lend a helping hand. Keep in mind that a home usually must be held for three to five years to break even on the cost.

“There's such tremendous wealth in the Boomer generation," says Angie O’Leary, head of Wealth Planning at RBC Wealth Management in the US. “The market's been good to them, they're on their retirement path or in their peak earning years, and they may be able to afford to help their kids out. For these people, it can be attractive to pass some wealth onto their kids now, when they need it, instead of as an inheritance decades from now when their kids are already in their own peak earning years."

Choosing the Right Strategy

Relatives considering a gift should look at their options before committing to one plan or another. Meet with your financial professional to consider the impact different giving strategies could have on the children’s financial situation and especially your own retirement plan. After all, a gift is probably not much of a help if your children end up having to pay for your care later in life, or it causes you to worry about retirement funding. 

If you’ve got the money to commit to assistance with a home purchase, there are three general ways you can go about it:
  1. Provide an intrafamily loan
  2. Money as a gift
  3. Co-sign a mortgage
“Parents or grandparents can make an intrafamily loan using the applicable federal rate," says Bill Ringham, director of private wealth strategies at RBC Wealth Management in the US. “Because this rate is significantly below today's mortgage rates, this option can save children hundreds of thousands of dollars in interest." This rate is the lowest that can be charged while avoiding gift taxes.

In addition, the loan can be forgiven simply by using the gift tax exclusion. In 2023, an individual can give up to $17,000 to any number of people without exhausting any part of their lifetime exemption from estate and gift tax. With this in mind, a couple could give a child and their spouse up to $68,000 per year, since each member of the couple can give the full amount of $17,000 to each person, or $34,000 total. Make sure to use an attorney if you go this route, Ringham cautions, so the loan is properly documented in case the IRS comes knocking. 

Parents or grandparents who don’t have cash for a loan may want to co-sign a mortgage for the kids. The upside is this can make it easier for the child to qualify for a loan. But an important downside to consider is that the co-signer is legally responsible for the debt on the home, and any hits to their credit score from late or missed payments. If your married child winds up divorced, some or all of the assets could be forfeited to the ex-spouse. 

Estate Planning 

An important aspect of gifting is to include it in your overall wealth plan. Intrafamily loans can help transfer wealth in a tax-efficient manner while setting children up with an asset that may appreciate over time. But keep in mind that if there is more than one child or grandchild now or in the future, you may need to consider if you can offer the same assistance to all family members without damaging your own retirement. 

Make sure to communicate clearly with both your financial professional and family members about expectations. Your own needs should come first, and a professional should help you work through the consequences of any gift, including co-signing. It’s not only an act of love, but a commitment that should be put in writing so all parties know exactly what to expect. 

This article is not intended to be a substitute for professional financial advice from a qualified financial advisor.