How can I help my child buy their first home? What tax forms do I need if I give my children money for a house down payment? How do I help my children with a home loan? What impact will loans have on wills and trusts? How do you pass on multi-generational wealth through property? How do I protect my child’s property investment in case of divorce?
By James L. Cunningham Jr, Esq.
“Will my child ever be able to buy a home if I don’t help out? Is homeownership important to my child’s security in the long run? If I don’t help out, will they have to move so far away that I will never see the grandkids?”
I hear these questions all the time from older parents. You may have worked for years to save up substantial savings to buy your own home, but in today’s world, that road is getting harder for each generation.
Between the roller coaster of housing crises and global inflation, it’s alarmingly probable that many people won’t ever have the means to buy a home on their own financial merit. The result? A massive loss of security for the future of your family.
Unfortunately, with the best intentions, it’s frighteningly easy to create a disaster for your family when you try to help your kid purchase property for the first time. For example, if you give your child a loan to buy a house and they don’t pay it back, you risk setting the scene for major family drama. If you give money or a house as a gift, will the other siblings be angry that one is being helped out? Will they complain about their diminished portion of your estate? Are you endangering your retirement? But if you don’t help out, will your children be forced to move out of state to buy a home, leaving you far from the grandkids?
The last thing you want is to destroy your family’s financial security—not to mention family relationships—forever.
The questions are tough, but at the end of the day, I think you have to ask yourself: what is money if not a tool to achieve a goal? A basic device used to carry out a particular function? Keeping grandkids close may be vital to you, and homeownership may be vital to your family’s long-term future. Indeed, enabling home ownership may be one of the best uses of your money imaginable, and basic to the creation of multi-generational wealth.
Our firm can help you navigate these issues and create the structures to benefit your family over the long haul. In this article, we’ll try to provide some guidance, but please consider contacting CunninghamLegal to discuss your personal situation.
How can I help my child buy a home?
When it comes to specific methods for helping your child buy a home, you’ve really only got two good options: an outright gift or a loan. In my opinion, neither solution is inherently better than the other, but one may work better or worse with your family’s personal situation and finances.
If your child has a history of financial irresponsibility, then a loan might not be the way to go—unless you want to lose thousands in another failed “investment.” In that situation, an outright gift of a pre-purchased property might go further towards securing their future and the safety of your investment. We’ll explore both options in this article, but as always with such questions, it comes down to family dynamics.
But couldn’t I buy a house together with my child, with joint ownership?
I said there are only two good options, loan or gift, but let me deal with the obvious “third route” before moving on. Yes, you could jointly purchase a house with your child, with you putting up, say, half of the money, and they the other half. This can work, but has added issues and situational complexity. How are repairs handled? How are liability and insurance handled? Who makes decisions about improvements? What happens if a room gets rented out? How would taxes and mortgage deductions be handled? Who decides when to sell? How would profits and capital gains be distributed? The list goes on and on.
Often, these issues are not properly addressed and are handled on a “figure it out as you go along” approach. One alternative is a Tenancy in Common (TIC) agreement that sets forth who is responsible for what, who pays, buying a partner out, and so on.
Should I co-sign a loan for my child to buy a home?
Parents wanting to help their adult child buy a house often co-sign for the loan, and then, once escrow is closed, convey all title to the child. This may seem like a good strategy—at first— but you are creating a situation in which you are still liable on the note, but you no longer have control over the underlying property. Stated another way, the parent would not own the house, but still be responsible for the entire payment if the kids didn’t pay the mortgage! Not a good situation.
Should I create an LLC with my child to buy a house for them to live in?
Some people might think a good approach is to create a limited liability company, or LLC, to own the home. Typically, personal use assets are not put into LLCs. If you create an LLC with your child to jointly buy and own a personal use residential property, the chief difficulty is getting a loan at a favorable rate. There are other Proposition 13 and Proposition 19 issues that arise when a property is owned by an LLC. Broadly speaking, putting a personal use asset in an LLC can be done, but it is more of an exception than a usual method of holding title.
First, consider a loan or gift. Only if these don’t work in your situation, look at joint ownership and the LLC structure—and work with a lawyer to make sure you do it right!
How do I give my children an outright gift of cash to buy a home?
If you want to give your child an outright gift of cash to purchase a home, you can’t just hand a big check over at the dinner table—you need to do it the right way and follow the proper channels.
In theory, it should be straightforward to transfer money from parent to child—and for small amounts, it is. The government doesn’t care if you want to send your daughter $500 for Christmas goodies, or your son $1,000 for rent, or even $3,000 apiece for their pets’ veterinary bills. However, the Fed starts paying attention when you’re dealing with home-buying numbers.
Far too many people give large sums to their children without understanding the need to comply with Federal Law and file the Federal Form 709.
Form 709 is the federal gift tax return form. It’s a clear memo to the federal government that says, “Hey there, I’m giving my kid some money, everyone’s following the rules, don’t come after them for money laundering or us for not following the rules.” The federal government requires this form for any gifts over the amount of $17,000 as of 2023 ($16,000 in 2022).
Now, you might be saying, “But Jim, how would they know the money was mine if my child is making a down payment from their own bank account? Why does it matter?” I understand the desire to avoid following the rules. It’s your money, you earned it, and you should have the right to give it to your flesh and blood. Let me tell you, though, the IRS doesn’t feel that way—and that kind of thinking is a slippery slope toward tax evasion.
Let’s say your daughter Andrea works a steady salaried job for about $85,000 a year. She’s reasonably responsible with money, has excellent credit, and maintains a savings account of about $50,000. Then one day, out of the blue, Andrea shows up at a property open house with a check for $2 million. The realtor starts the paperwork with glee…until they do a basic financial history check and discovers the money arrived as a lump sum in Andrea’s account only a month ago and there’s no way she could’ve earned that money from her job in that time. Andrea will need to disclose the source of the funds in the process of buying the home. Large sums that are held for short periods in bank accounts trigger anti-money laundering rules. If Andrea has had the money for a short time, this will likely cause a red flag in the transaction. In less than 24 hours, your generous gift to Andrea may go from a dream home donation to a financial investigation nightmare.
What is the right way to gift money to a child to help buy a home?
Alternatively (and properly!) you could simply fill out IRS Form 709 and wire the money directly to escrow. This is the regular and correct way of helping a child buy a home when you are fronting some or all of the money, and avoids bank or IRS issues with large amounts of money moving through your child’s bank account.
How do I pre-purchase a property as a gift to my child?
Pre-purchasing a property and gifting the property, not the money, is of course another option for helping your child get into a home. In this situation, you’ll still file Form 709 for the amount of the gift, but you’ll also get a property appraisal and sign a deed that conveys the property to your child.
When you make any large gift, it’s also vital to understand the long-term implications for your estate taxes at death. In essence, and if done properly, each large gift can be subtracted from a lifetime tax-free gifting threshold set at $12,920,000 (as of 2023).
This threshold is currently scheduled to be cut in half in 2026—so do your homework quickly. The situation is more complicated for married couples—and is another reason to consult a California estate attorney before making a large gift.
That same attorney can help you understand the implications of a gift on community property and potential divorce—which I discuss later in this article.
Can I loan money to my child to help them buy a home?
Yes, you can loan money to your child to help them buy a home. It’s a great option if you can’t afford an outright gift.
For some reason, people in the world of family finance often consider “loan” a bit of a dirty word, but it doesn’t have to be. As a teacher once told me, “In this world, there are only owners and loaners.” I take that to simply mean that there are two ways of passing money from one person to another. The second method isn’t devious or less worthy, you’re simply handling a financial situation in a way that makes it workable for both parties.
Just be careful to handle it properly as a true loan.
How do we legally define “loan?” A loan is an amount of money given to a second party with three stipulations:
- Repayment of principle (the time frame in which a recipient should repay the loan)
- Interest (a predetermined amount of interest on that principal amount based on current federal interest rates)
- Security (a legal guarantee of that money being repaid in some form)
That’s it. That’s the entire definition. Things get muddy, however, when a family member strays outside this definition. For instance, if you loan your son Jimmy $200,000, but don’t charge interest, that starts looking more like a gift and less like a loan. If Jimmy doesn’t pay you interest as promised, it may or may not cause catastrophic family rifts, and can cause problems when the death tax bill becomes due. So, without documentation and repayment, it’s not a loan: it’s a gift that requires a gift tax return.
It might seem a pain to go through the legal process of a loan with your child, but it can help to smooth over relationships. When you have a legal, binding loan agreement with due dates, you’re not the one nagging for payments—it’s required by law to avoid the gift tax. Legal contracts also create a sense of responsibility in the recipient, so there’s no messy middle ground when it comes to who’s going to bring up money over the Thanksgiving turkey.
How do I set up a loan to help my child buy a house?
When you set up a loan to help your child buy a house, the process is very similar to setting up a gift. Just as with an outright gift, you’ll start by transferring a set amount of money to escrow, be it a full payment or a down payment. However, your child will then sign a “Note” (writing showing that the money borrowed must be repaid) that must carry at least an interest rate that the government sets monthly known as the “Applicable Federal Rate.” In other words, to the extent you loan your child money at rates less than those published by the IRS, the government will consider the “undercharge” of interest as a gift.
And remember: if you’re only doing a down payment, and you sign a loan agreement for that down payment, but then decide to loan more for an overhead cost, you will need a new loan agreement. You have to keep everything formal and documented.
Can I “loan a property” to a child to live in?
There’s a better name for a property loan, and it’s “rent.” Keep in mind that if you purchase a property and then loan it to your child, you’re effectively setting up a landlord/renter relationship. And you need to charge rent. To the extent you do not charge rent, this may be a gift.
Like “loan,” the word “landlord” tends to leave us feeling uncomfortable in family situations. But if handled responsibly, renting to your child ensures they have a stable living situation. Keep in mind, however, that you must rent to them at market value. Charging them substantially less than market price means you’re essentially gifting them the remaining value, and then we all head back into the paperwork pile to start again.
Will helping my child buy a home affect my Estate Plan?
Yes, helping your child buy a home will likely have an impact on your Estate Plan. Any large financial move or property rearrangement affects your Estate Plan.
Adding or subtracting wealth, property, and investments throughout your life changes what is or isn’t left to your loved ones in your Will and Living Trust. If you gift your only child Megan $200,000 for a down payment on a house, and she’s the only recipient in your Estate Plan, you’re probably not creating any issues when you pass away.
Unfortunately, things get more complicated when we’re dealing with multiple children, spouses, or loans. Say Megan has a sister, Juliet. Ten years down the line, when Juliet discovers that Megan received financial help, but the estate plan wasn’t adjusted to reflect that, the inheritance disagreements can get extremely nasty. You don’t want your helpful gift to turn into a permanent family rift after your passing.
Another alternative is an advance on an inheritance. An advance on an inheritance should be documented and is treated as neither a loan nor a gift – it’s advancing something the person will inherit when you pass away. It is brought back into your estate when it comes time to divide the property after your passing.
Do you help one child buy a home, but not the other? If you do that, does one child’s inheritance decrease? Do you forgive the debt at death? Do these decisions affect your children’s inheritance rights?
Questions like these are hard to answer, and should not be answered alone. Talk to a qualified estate attorney who has done this kind of thing before, and work out a plan—then talk your lawyer-approved plan through with everyone involved. Don’t try to figure it out on your own; and for heaven’s sake, don’t keep everything a secret and let the screaming matches start at your funeral!
How do I protect my gift of a house from my child’s possible divorce?
California is a community property state, but in theory, a gift does not automatically become community property when you give it to your child. In practice, however, the gift is at risk of “transmutation” from separate property to community property and thereafter subject to division as community property in a “dissolution of marriage” which is a divorce. This can happen in many ways including depositing funds into a joint bank account or used to purchase something like a house that community funds are later used to maintain.
Let me give an example.
Let’s say you gift Jimmy some money to buy a house as a wedding present in a special account under his name, but he signs the purchase agreement after marriage. In this case, although the money started as separate property, when it is used to purchase the house, it can immediately become community property if Jimmy and his bride take title to the house as community property. Even if they don’t, when community funds (such as paychecks) are used to make mortgage payments, pay taxes, and make repairs and improvements, some (or sometimes all) of the property stops being Jimmy’s separate property and becomes community property.
In other words, you didn’t just buy a house for Jimmy, you bought one for him and his wife! If they divorce (and half of all marriages end in divorce!), his wife could very easily end up with a good portion of the property in the negotiations.
If you buy a property yourself and give it to Jimmy in his name, but community funds (earnings) are later used to make payments, improvements, and the like, it can become, bit by bit, community property.
Remember this: if only one spouse is on a deed, it does not automatically mean that the property is separate property—just as when Jimmy deposits his paycheck into an account with only his name on it, those funds are still community property.
You may be able to work with a lawyer to properly transfer title to your child without creating a community property issue, but it’s tricky—and of course, you also risk creating hard feelings in your child’s marriage.
What about renting a home to my child now and then letting them inherit?
Ultimately, the very simplest way to keep control over a property and prevent transmutation to community property is buying a house, renting it to your child while you are alive, and then leaving it to them through your living trust. Of course, this may or may not be appropriate in your situation.
Can certain will and trust structures help my child buy a home?
Yes, but you need a qualified California Estate Attorney to structure the will and trust properly. For example, you could use a stand-alone document in conjunction with your Will or Living Trust to acknowledge an advance on an inheritance (meaning your child receives their inheritance while you’re still alive) or you could put that money into a special, irrevocable trust created to help your child purchase property down the line.
If done properly, these methods could also be used to protect against the loss of the property in a divorce—but it’s a complex topic that we will not cover in this article.
Bottom line? There’s no ideal solution for every family. Consult with a specialized California Estate Attorney before choosing any path.
How do I start the process of helping my child buy a home?
At CunninghamLegal, we help guide families through some of their most difficult and emotional financial decisions while making sure that all tax and estate impacts are properly considered. We understand that you want to provide for your children and your future—and we want to help you do it correctly.
Reach out to make an appointment with CunninghamLegal for Corporate and Tax Planning, Estate Planning, and additional financial decisions. We’re happy to talk to you about your future via phone at (866) 988-3956 or via our online call booking system. You can also use the inquiry form on this page.
We look forward to helping you protect your family’s future!
James Cunningham Jr., Esq.
We guide savvy, caring families in the protection and transfer of multi-generational wealth.