Between rising home prices and millennial student loan debt, many parents are in a financial position to help their millennial buy a house, here are 3 ways. Be warned, though: Buying a house for your adult child isn’t so straightforward. Purchasing a house for your kid requires careful planning. Here, realtor.com tells you what you need to know and your options for getting it done.
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Gift the down-payment money
Money can be classified as either a loan or a gift when you contribute funds to your child’s down payment for a mortgage. The decision has major tax implications. If you provide the cash as a loan, your kid (or you) will have to pay taxes on it. However, gift money can be transferred tax-free up to a certain limit. For 2018, any gift of $15,000 or higher will incur taxes, up from $14,000 in 2017. For couples, however, that means each person can gift $15,000 to their child tax-free, for a total of $30,000. Note: If you gift the down payment, your child’s mortgage lender will require proof showing that the money is indeed a gift. This must come in the form of a gift letter, where you swear on paper that you don’t plan on asking for the money back. But that letter might be insufficient for your child’s mortgage lender. In many cases, you’ll have to provide a paper trail verifying where the money is coming from, and most lenders will require two months of statements from your bank account.
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Buy the house and rent it out to your kid
If you can afford it, you have the option of buying a home solely in your name and renting it out to your child; in fact, this may be your only option if your kid can’t qualify for a mortgage. Fortunately, property taxes, mortgage interest, repairs, maintenance and structural improvements are generally deductible on a second home. Be warned: Your kid must pay you rent for you to qualify for these tax deductions. If you let your child live in the house for free, you won’t receive any write-offs.
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Buy and co-own the house
The third approach is to purchase a home and co-own it with your child. In this case you’d be purchasing the home and dividing the equity in whatever percentage you choose, and when the house is sold, your share of the money would be repaid. This is a good arrangement if you eventually plan to sell your portion of the house to your kid. However, not all mortgage lenders offer home loans for shared ownership. Another drawback? If your kid can’t pay the mortgage, you’re on the hook for it.