Assuming you have enough liquid assets, you can effectively act as the mortgage lender to your child by lending money to pay for the house.
Another option is to give the child money for a down payment on a house. Making a gift to your child for the down payment is an ideal situation for parents who are primarily concerned with decreasing the size of their estate and the taxes on it after their death. Current tax law lets individuals make annual gifts of up to $14,000 per person. If both parents join in the gift, they can give the child $28,000 without any gift tax liability.
With some planning, even larger gifts can be made. For instance, if the child is married, his or her spouse is also eligible to receive gifts. Collectively, a married couple could receive $56,000 in gift-tax-free cash for a home purchase. If the gift is spread over a new year, it can be increased to double the amount, giving the child and his or her spouse $112,000 toward the cost of the home.
Another possibility is pledging securities to secure a child’s home loan at a financial institution. By pledging securities instead of selling them, the parents can be saved from a potentially taxable event.
Finally, another alternative is equity sharing where the ownership of the home is shared. Typically, the parent makes the down payment, and the child pays the mortgage payment, utilities, taxes, and other ongoing expenses. The home is jointly owned, and the family can agree on a split of any appreciation in value if the home is later sold.
For details on these and other options available to parents who want to help their child buy a home, give us a call.