Should You Help Your Child Buy a Home?
So you want your child to be a homeowner. The problem is they do not have enough funds for a down payment. Yeah, you may be eager to give them a loan or a gift, maybe help them with the down payment or the closing costs or whatever it is they need help with but before you take this generous step, you need to do some serious thinking and evaluate the effect of your move on both your current and future financial situation.
We talked to some financial experts about this, and here is what they had to say.
Make sure you are not hurting your future in any way
This single tip is the most importance advice for you. Whichever amount you want to lend or give to your child, make sure it will not affect you now and in the time to come. Even after giving away the money, you should be able to meet your current needs comfortably and have a secure retirement. And if you are lending, there is a chance that you will never get it back. Be sure to consider this as well.
Now decide whether you want to gift or lend
If you are giving away the money as a gift, you already know you are not getting it back. For your child, this is going to be advantageous. It is not going to add to their debt or decrease their chances of a mortgage approval.
Those who choose to lend their children money should make certain that the loan agreement is documented properly. This includes a legal contract that spells out all of the terms. Without this agreement, the IRS will deem the money as a gift.
Consider the effect of taxes
Whether you are giving your child a gift or a loan, it will influence your taxes. If the amount is greater than $14,000 a year, you will probably end up paying larger taxes. Even if you are given the money as a loan, you need to document it properly so that the IRS does not regard it as a gift. One more thing to note: When your child pays you back the loan, it will count towards your income. What if you do not charge any interest? You may still be incurring imputed interest.
And in the end, will your child be able to manage homeownership?
There are many non-financial considerations as well. If your child cannot take on the responsibilities that come with homeownership, there is just no point in helping them.
Plus, you probably have more than one child. Will you be able to do this for all of them? Think wisely and then act.