Parents: to help children buy a home or not is a loaded question

Posted by Tom Kalinski Founder RE/MAX of Boulder on Tuesday, August 12th, 2014 at 1:04pm.

Buying a home has never been more difficult, but for young adults loaded down with student loan debt and jobs hard to come by, it’s an especially steep uphill battle.

Although they could do so with financial support, parents should ask themselves what lending or giving their children help will cost – not only the parents, but the children, as well.

Here's some advice from financial experts provided to The Wall Street Journal:

Stay off that limb

Perhaps the No. 1 tip of financial experts to parents considering giving or lending their children money to buy a home is to not part with more than they can afford. And that’s not as simple as considering current needs; they should consider whether what they give or loan their children will take away from what they need for retirement.

And even if it’s a loan, parents should provide the funds with the assumption that they will never get it back.

To give or to lend?

Parents know for certain they’ll never see their money again if they are giving it to their child, and the gift doesn’t add to the child’s debt burden and hurt their chances of qualifying for a mortgage, as another loan on top of student loans might.

However, parents who want to give money to their children for a down payment should do so far enough in advance of the home purchase to assure banks that it isn’t a loan.

Parents also should consider the long-term tax implications that accompany gifts. For instance, gifts of more than $14,000 per parent to one child in a given year could count against the parents’ lifetime gift-tax exemption, resulting in high taxes on the eventual inheritance of large estates, the WSJ reports.

When parents lend money to their children, they need to document the loan properly with a legal contract that spells out the terms so the Internal Revenue Service can’t identify it as a gift.

Parents also must report interest payments as income, but not charging the child interest doesn’t mean nothing will be owed to the IRS, as the IRS can assume a certain level of interest income whether it was received, called “imputed interest.”

Learning lessons

Providing an adult child a gift of money to buy a home involves more than finances, according to the WSJ.

If just given the money, the child may not understand the responsibilities associated with buying and owning a home, and they are less likely to appreciate and value the gift, the WSJ reports. If the child has siblings, they may resent the parents’ gift to the one child, as well.

Some experts recommend a shared-equity arrangement in which parents provide a down payment and, in return, they have 50 percent ownership of the house. In that case, the parents get their money back when it sells if sold at a high enough price.

Regardless of how they help, parents should speak about the specifics of money with their children so their expectations are reasonable when they begin looking for a home, WSJ’s sources advise.

The right time

Beyond the questions of whether parents are financially able to help, whether siblings are in the picture and whether the child is responsible, the question of whether the time is right to buy a home remains.

Is the child at a point professionally and personally that makes this a good time to buy a house? If the child is in his/her 20s, with several career and/or family changes in their future, chances are it’s not a good time.

Not only will the need to move too soon prevent the home from selling for a price that covers all the costs associated with buying and owning the home, but the child could lose his/her job in this uncertain economy or if he/she isn’t able to stick with a job for long.

Tom Kalinski 
Owner and Founder
RE/MAX of Boulder

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