It is common for parents to help adult children purchase their first home. They remember how challenging it was to buy a house when they were just starting out in their career and had young kids at home or on the way. Of course, parents should be able to help their adult children, and they can do it without being vulnerable to an extreme amount of tax payout.
When anyone gifts a large sum of money totaling over $15,000 in one year, the sum is to be taxed as a gift. If your intention is to give under $15,000 to help with the down payment, then that money is tax-free.
Some parents would like to pay for the whole house or the entire down payment. If you don’t want to spend the gift taxes on that money, some other options may include:
- Parents buying the home and renting it out to their adult children. This option would not include the house in the child’s name, but it is a great way to be helpful. You can rent your property out to your adult child and give them a break on rent.
- A mortgage note agreement between the parents and adult children, including fair interest rates and a monthly payback agreement. When the IRS investigates the large sum of money, they will ask for the mortgage note and verify that it is fair. A benefit to lending the money to your adult child is that you can agree on the down payment without it having to be an amount that a lender would require. Remember, the mortgage must be legitimate and recorded with the local recorder of deeds.
- Gifting the adult children under $15,000 each year as they pay down their home. Instead of giving your child $500,000 for a home, you could agree to pay them an amount under $15,000 each year to help with their mortgage payments or help pay down their mortgage more quickly. That way, you would avoid a gift tax altogether while helping immensely.
For those parents who would like to help with their child’s first home purchase, these options are great alternatives to giving a large lump sum at once.
Contact Professional Real Estate Services
If you have questions in regards to financing your home, give us a call to go over the logistics. Our experienced team can help you determine the best way to accept a gift payment for your home. Give a call to Kirsten DeHart at Wood River Properties to explore the luxury real estate opportunities in beautiful Sun Valley: (208) 721-4131.