A quick guide to buying a home for your child
The lingering effects of the great recession, such as affordable housing shortages, stringent mortgage requirements and a tight job market, have made it more difficult for young people to own their own homes. As a result, support from bank of mom and dad becomes common, especially for newcomers.
Funds to help adult children buy a home or condo is a blessing and a luxury. But before you sign on the dotted line, consider if and how you can best do this. There is no right way to guide your child into homeownership, but many wrong ways.
Include common scenarios to help out:
- Provide the down payment for the child’s home.
- Buy the house and rent it to your child.
- Buy the house and let the child live there freely.
- Own the home jointly with your child (dividing equity in the percentage you choose); when the home sells, you get your money back.
- Buy a multifamily property (or a place big enough for roommates) and rent the other unit(s) to offset the cost.
- Finance your child’s home purchase and make it official by making it like any other mortgage; a mortgage servicer can help properly structure the loan and its payment terms, and even prepare monthly statements and tax forms.
For tax reasons, parents often choose to provide their offspring with the money they need instead of paying the costs directly. For example, the current amount for the payment of gift tax is about 14.000 USD per recipient per gifter per year. For example, you and your spouse could give your child and his or her spouse up to 56.000 $ (14.000 $ x 2 gifting parents x 2 recipients) – enough for a respectable down payment in most american cities. You can make the first gift after the 1. January of the following year with another gift of 56.000 US dollars pursue. The $112, 000 total does not count as income or subject to state income tax, on your child’s tax return. (see also: what are gift taxes? )
Keep in mind that “if the parents are giving the money away … The money needs to be obtained along with a gift letter,” says linda robinson, a broker and loan officer with sapphire property in san diego to protect the transaction, use a mortgage professional who has experience with this, she says.
Points to consider
- Some lenders require all parties to be on title on the mortgage contract. Means that even if the child is supposed to handle the monthly mortgage payments, the parents are also financially responsible for the debt.
- If parents are not in the mortgage, they can not claim the mortgage interest tax. Even an interest-free loan from a parent to a child can be taxable to the parent.The IRS assumes you are earning interest even if you are not, and that is taxable income.
- Parent loans increase the child’s debt burden and can hurt the child’s chance of qualifying for additional financing. On the positive side, a correctly quoted loan allows the child to maximize tax deductions.
- Even if parents make a down payment, the child must still qualify for the mortgage, and that includes cash reserves, a steady job and a stable income. That said, mortgage lenders typically allow the down payment on a primary home to be made in whole or in part with gift funds as long as other requirements are met. Freddie mac’s home possible advantage mortgage, for example, allows the entire 3% down payment to come from gifts or other funds.
A parent who buys a house and allows the child to live there could potentially take significant tax deductions. Property taxes, mortgage interest, repairs, maintenance and structural improvements are generally deductible for a second home. While a landlord each year up to 25.Can deduct $ 000 in losses, parents have different rules when renting to family members. If the child does not pay rent, this is considered personal use of the property and rental deductions are not allowed. However, if the child has roommates who pay rent, the parent can claim the rent-related deductions while allowing the child to live there rent-free. Read tax deductions for landlords for more information.
Note that the mortgage interest deduction can only be taken by a person who holds the mortgage
Pays and owns (or partially owns) the house. If the parent owns the property title but the child makes the mortgage payment every month, no one can take the interest deduction. If the child owns any percentage of the home, however, he or she can deduct that portion of the interest. Equity.
Mortgage payments may make more financial sense than giving children a monthly housing allowance or paying their monthly rent. Paying a mortgage builds equity in a home, and homes become assets – usually appreciating in value if properly maintained. Just remember that residential real estate is best viewed as a long-term investment: typically, most buyers need to hold a home for three to five years to just break even.
If parents choose to give the child a low-interest loan, which is in fact his or her mortgage lender, they enjoy a little income from the monthly payments. In the current anemic financial climate, even a low-interest loan can beat the return on some conservative investments. The disadvantages
. Homes purchased by parents as second homes or investments often require larger down payments because they do not qualify for generous, first-time application mortgages such as federal housing administration (FHA)-secured loans.”The difference between a primary mortgage and an investment mortgage is significant,” robinson notes. “You must put at least 20% to 30% down on investment property, and interest rates are slightly higher. If the children are at all creditworthy, the parents are better off being co-signers and gift givers than those on the loan. ” Credit and financial ramifications.
If a parent colludes on a mortgage and the child defaults on payments, the parent’s credit score is as damaging as the child’s. As a co-partner (and therefore co-borrower), the parent debtor is also responsible. A parent who agrees for – or gives money to – a married child who then divorces could be involved in a messy division of assets and could lose some or all of the investment to the ex-spouse. Damage to relationships.
Financial entanglements in families can cause stress and conflict. Siblings outside the stock market can be jealous or resentful. Gift givers can feel frustrated by what they perceive as misuse of the gift, but they are powerless to do anything about how the gift is used. Gift recipients can be frustrated by the strings attached to a gift that comes with expectations and rules. Some parents will not enforce consequences if the child does not maintain his or her end of the agreement. The bottom line
The advantages of buying or financially supporting a home for a child are manifold. It can give the child the tax benefits of home ownership and help him build a good credit history. Buying could also be beneficial if your parent’s estate is substantial enough to trigger estate taxes or inheritance taxes; reducing the estate can reduce your tax burden in the future. Plus, the property is an investment that can ultimately help parents even turn a profit or make a profit, with their expenses tax-deductible along the way.
Emotional consequences are harder to measure. Parents can work to foster a sense of entitlement in their child simply by giving them a home. Financial agreements between family members can often lead to confusing misunderstandings and be difficult to enforce.
Parents should never buy a child a home if it means they won’t be able to pay their own bills, make their own mortgage payments, or maintain their standard of living in retirement. It’s generally a bad idea to borrow against retirement funds or a primary residence, or to completely deplete accounts.
No matter how you decide to approach it – gift, loan, co-ownership – put it in writing. Create a contract with expectations and terms, and have an attorney or other real estate professional review it for unclear or overlooked details. This may be an act of love, but it must be considered a business arrangement between you and your offspring. After all, you know where they live.