Homeownership is key to building a strong financial foundation. According to a study conducted by the National Association of Realtors, a typical homeowner’s net worth is 40 times higher than that of a renter. But purchasing a home can be a costly and fraught undertaking, particularly when trying to enter a competitive housing market amid tough economic conditions. For parents of means, helping adult children purchase a home can position them to thrive—and hopefully begin to build their own wealth.
But what’s the best way to lend a hand? Should you loan them the money or gift it outright—and how do the different options affect your legacy planning and tax situation? Let’s break down four common ways parents can help their children secure a property, including when they might make sense and other considerations to weigh.
Option 1: Gift money for the entire purchase
Even if your child has enough money for a down payment, it may be better for them to skip the mortgage market altogether. For one, all-cash offers are more competitive than those that rely on financing—a significant advantage in housing markets where buyers outnumber sellers. Plus, higher interest rates can add to the cost of financing a home and may mean settling for something that doesn’t quite fit their needs.
Bigger picture, it’s also a great way to strengthen your family’s finances by potentially reducing future estate taxes. You can count the gift against your lifetime gift and estate tax exemption—$13.61 million per person in 2024—which would reduce the size of your estate.
In this way, you’d essentially help your child twice: at the outset when they’re buying a home, and again when they inherit your assets down the road. Just be sure to weight the decision against your overall estate plan, ideally with the help of your wealth advisor, to help ensure it doesn’t create unintended consequences.
Option 2: Place the property in a trust
Instead of gifting the money outright, another option is to purchase the home yourself and then place it in an irrevocable trust that names your child as beneficiary. This strategy is ideal for parents who want to help their child financially while also retaining some degree of control over rights of ownership in the future. If your child is married, for example, putting the home in a trust can help ensure the property remains separate from your child’s marital assets in the event of divorce. Or perhaps you want to shield the property from creditors or other future claimants.
This method can also generate similar estate tax savings as an outright gift since it involves either gifting cash to the trust to buy a home or transferring a property to the trust—both of which reduce your estate’s assets and avoid taxes insofar as they fall within your lifetime gift and estate tax exemption.
However, because an irrevocable trust cannot be altered after it’s created, you need to be sure it’s structured correctly and includes clear directions for the property’s management and eventual distribution to avoid any future family conflicts. An experienced estate-planning attorney can help you think through all the details.
Option 3: Establish co-ownership
Depending on your child’s age and projected time living in the property, it could make sense for both of you to be named as owners on the deed.
Co-ownership offers some key benefits. First, it allows the child to avoid paying rent to their parents if they owned the property by themselves; simply not paying rent in those situations would be considered a gift by the IRS, equal to the forgiven market value of the rent. Also, purchasing a home as co-owners allows some of the home’s appreciation to build in the child’s estate, lowering the overall reportable gift over time.
This setup is typically considered by wealthy parents who want to help their child buy a home that can be converted into a rental property one day—a great option for off-campus college housing or a starter home once they graduate. You might want the rental income for your own portfolio, or perhaps for your child to manage, setting them up for financial success and greater responsibility.
With co-ownership, you’ll need to consider when and how to handle the deed transfer when you or your child leaves the arrangement, how the property will be titled if you pass before then, and any potential capital gains liabilities if you need to sell.
Option 4: Make an intrafamily loan
For many parents, gifting the money (or property) outright is not the best course of action, whether due to complicated family dynamics or because such a gift would push them over the lifetime gift and estate tax exemption. At the same time, a traditional mortgage may be undesirable or inaccessible for their child due to high interest rates or a checkered credit history.
In such cases, an intrafamily loan can be a great choice. For one, you can typically charge your child a lower interest rate than the prevailing market-based mortgage rate. Second, your child won’t have transfer tax liability on any income the asset earns above the interest rate you charge, allowing them to fully benefit from any appreciation in the home’s value.
Just be aware that the IRS requires any loan between family members to be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate. If your loan is considered “below market,” the IRS will count the difference in interest against your annual or lifetime gift and estate tax exemption. And if the loan exceeds $10,000, you’ll need to report the interest income on your taxes.
Finally, if your child fails to repay the loan and you decide to forgive the debt, the unpaid balance will be treated as a gift for tax purposes and your child may owe income taxes on the remaining unpaid interest.
Set expectations
No matter which path you choose, communicate your goals and expectations with your child so there are no surprises down the road—for either of you.