Buying a house for a child

[euro]

Similar situation to OP. I sold one of my rental properties ("starter home", 1100 sft 3bed/2bath) to my son for about $250k total. Gifted a large downpayment and took back a $100k note so that he has SOME payment responsibility but a very low monthly payment. A few years ago, the minimum interest the IRS allows for longterm loans was around 2%, so his payment is something like $150/mo. This seems to be working out really well for us.

 

[Time2]

I remember that. The only issue I have is: Let your daughter and son-in-law pick up the tab when you go out to dinner from now on! (You've more than earned it, they can afford it thanks to you and your DW, and it's good for them to give as well as to receive.)

That's a good point we are living on comfortably on $70k to $80k, while the two of them are earning between $250k and $300k. I doubt my wife will see it that way, she's Asian and, it's always for the kids!

 

[DawgSavr]

Timely post. We are in the process of looking for a starter home for our 29 year old son as well. He sleeps and eats at home, but other than that he works all the time so we rarely see him. He is very conservative and has saved a considerable amount of money, distributed across various buckets. Retirement (401K, TradIRA, RothIRA), Taxable Brokerage Investments, HSA, House DownPayment/Closing Cost Savings and Emergency Fund. He has been preapproved and understands the price range he needs to be in to not be house poor. However, we are still experiencing bidding wars on homes here in the midwest and he's been outbid numerous times. Especially with all cash offers. He does not want anything given to him, however, we do want to help him out while keeping the money in the family so to speak. So my wife and I will be the Bank and purchase the house with Cash and in turn provide the mortgage to him at a substantially reduced rate. We are looking to leverage National Family Mortgage (www.nationalfamilymortage.com) and charge the minimum AFR rate. That way he builds equity and can deduct the interest paid. Yes, we will have to claim the interest as income, and likely could make a bit more than the minimum AFR rate leaving it in a high-yield cash/CD account but that's not the point. Our goal is to help him get a quality home in a very competitive market that he can live in, learn new skills of how to maintain/repair/upgrade a home with sweat equity, while having skin in the game to build equity in the event he decides to sell the home. If something should happen to his mother and I in the future and he still is in the house, the remaining balance is free and clear and just becomes part of his inheritance share. So we have a plan...it's just finding that right piece of property in that good location that is the challenge right now

 

[Sunset]

Timely post. We are in the process of looking for a starter home for our 29 year old son as well. He sleeps and eats at home, but other than that he works all the time so we rarely see him. He is very conservative and has saved a considerable amount of money, distributed across various buckets. Retirement (401K, TradIRA, RothIRA), Taxable Brokerage Investments, HSA, House DownPayment/Closing Cost Savings and Emergency Fund. He has been preapproved and understands the price range he needs to be in to not be house poor. However, we are still experiencing bidding wars on homes here in the midwest and he's been outbid numerous times. Especially with all cash offers. He does not want anything given to him, however, we do want to help him out while keeping the money in the family so to speak. So my wife and I will be the Bank and purchase the house with Cash and in turn provide the mortgage to him at a substantially reduced rate. We are looking to leverage National Family Mortgage (www.nationalfamilymortage.com) and charge the minimum AFR rate. That way he builds equity and can deduct the interest paid. Yes, we will have to claim the interest as income, and likely could make a bit more than the minimum AFR rate leaving it in a high-yield cash/CD account but that's not the point. Our goal is to help him get a quality home in a very competitive market that he can live in, learn new skills of how to maintain/repair/upgrade a home with sweat equity, while having skin in the game to build equity in the event he decides to sell the home. If something should happen to his mother and I in the future and he still is in the house, the remaining balance is free and clear and just becomes part of his inheritance share. So we have a plan...it's just finding that right piece of property in that good location that is the challenge right now

I was going to look at this as it seems you are adding a complication and an expense for simply providing a mortgage that a lawyer could write up easily. That is what my Mom did.
Simply had the lawyer write and register the mortgage, no ongoing fees etc.

However the domain is gone missing (and doesn't seem to be USA based at all) :

 

[silvor]

I know it can depend on the state and you can work with a trust, but make sure if/when he marries the house is his.

 

[ncbill]

I was going to look at this as it seems you are adding a complication and an expense for simply providing a mortgage that a lawyer could write up easily. That is what my Mom did.
Simply had the lawyer write and register the mortgage, no ongoing fees etc.

However the domain is gone missing (and doesn't seem to be USA based at all) :

This link works

 

[euro]

I was going to look at this as it seems you are adding a complication and an expense for simply providing a mortgage that a lawyer could write up easily. That is what my Mom did.
Simply had the lawyer write and register the mortgage, no ongoing fees etc.
:

Agree - I don't quite understand the purpose of involving a third party. The son will be able to deduct any interest he pays to the parents and yes, the parents will report the interest as income. In our case, I did a simple "interest only" 30 year mortgage (which lowered the monthly payment even more, of course), because I figured that my son will inherit the property eventually anyway, but you can, of course, set up any (legal) terms you wish. The closing attorney can easily set up the deed/mortgage papers for a very small fee.

 

[euro]

I know it can depend on the state and you can work with a trust, but make sure if/when he marries the house is his.

This is a personal choice, of course, so no "right or wrong", but my personal philosophy is that if I make a gift, I cede all future control. In other words, I gift a house to my child (or work financing, loans, etc), my child decides what to do with it. If they want to do a prenup to secure the property ownership, that's fine. If they want to get married and bring the property as community property into the marriage, then that is fine with me too.

 

[DawgSavr]

Agree - I don't quite understand the purpose of involving a third party. The son will be able to deduct any interest he pays to the parents and yes, the parents will report the interest as income. In our case, I did a simple "interest only" 30 year mortgage (which lowered the monthly payment even more, of course), because I figured that my son will inherit the property eventually anyway, but you can, of course, set up any (legal) terms you wish. The closing attorney can easily set up the deed/mortgage papers for a very small fee.

Thank you for the additional insight. I will talk with a lawyer as another option. The benefits of this forum at it's best to throw out ideas and to learn from experience of others!

 

[DawgSavr]

My apologies...I had a typo in the original post. Correct URL is: www.nationalfamilymortgage.com

 

[Deuce]

Housing prices will not recede.

 

[gwill1010]

We bought a small house for our 'challenged' DS and daughter-in-law two years ago. We own it and pay the taxes; they live in it rent free. We let our other, successful, DS know what we were doing which he understood and agreed to. We bought it with my IRA money. This bumped up our income so we're paying IRMAA this year.

If either of you get audited by the IRS you're not going to be happy. My wife is a CPA and has researched this. Weather he pays you rent or not you're supposed to claim a fair market value monthly rent as income. Our son lives in the condo we own, but he does pay rent.

 

[gwill1010]

We bought a $312k townhome for our younger son and his family during the height of Covid, back in March 2020, closed in June.
We keep the house in our name, but each of our sons will get the house they live in after we pass with the stepped up basis.
It’s increased about $130k in value in three years.

Do they pay rent and are you declaring the income? The IRS expects you to claim a fair market income weather they are paying you or not. Best of luck.

 

[gwill1010]

When the time comes, I'm trying to figure out the best way to get him in a house, I could just buy the house and give it to him, I could have him get the mortgage and then we could gift him $17k or $34k a yr to pay his mortgage. I'm sure there are other options.

I'm not willing to entertain, we should not buy him a home. We want to.

If you give someone a house don't they have to declare it as income Can you gift more than 15K now w/o tax consequences??

 

[2retireearly]

Tax consequeces

If you 'give' to him, directly a big sum of money, there are taxes to be paid. So whatever you do, ask a financial expert how to do it best.

 

[meleana]

Your son is very lucky.

Our son is 35 and still in the run down apartment he’s been in since a few years after graduating college.

He doesn’t want a house- the upkeep, etc. A condo he’d like but there are literally none available where he lives. Housing prices are crazy out of control in our state, too.

We told him we’d help him with a down payment if something ever became available but the other thing is he has not gotten a pre approval and even if he did it would expire just waiting around for something to be available.

He’s not that motivated when it comes to this anyway. He just resigned from his job of 11 years to work in the field he enjoys. Yet still feels sad about it because he hates change.

I’m hoping one day when we pass he will be able to live in our house which would be perfect for him. It’s a small cottage, HOA, etc. about a half hour from where he lives now.

Other than that I don’t see other options at least right now.

 

[FLJim]

Housing prices will not recede.

said my grandfather in 1931. And by 1939 he owned a nice real estate portfolio.

 

[Sunset]

If you give someone a house don't they have to declare it as income Can you gift more than 15K now w/o tax consequences??

If you 'give' to him, directly a big sum of money, there are taxes to be paid. So whatever you do, ask a financial expert how to do it best.

As I understand it, each person can gift another $15K each year, without declaring anything each year.
A person can also gift a LOT more, say $400,000 to a person. The receiver doesn't declare it as income. The giver has to fill out a form 709 for the IRS stating the value of the gift, and this amount is counted against their lifetime exemption for estates being tax free upon death.

https://financeband.com/can-you-give-someone-a-large-sum-of-money

 

[Badger]

...When the time comes, I'm trying to figure out the best way to get him in a house, I could just buy the house and give it to him, I could have him get the mortgage and then we could gift him $17k or $34k a yr to pay his mortgage. I'm sure there are other options...

I like this idea. The house/mortgage would be in his name as he uses the money he is setting aside for a future home for mortgage payments. He can use the interest on the mortgage he is paying for tax purposes, build his credit, and get into a house sooner. Then your annual gifting of $34k can go to paying down on the principal to shorten the mortgage to save the interest he would have paid on those years.
I'm not an expert so those with more experience in money manipulation are welcome to show pitfalls in the idea.

Cheers!

 

[Time2]

Housing prices will not recede.

said my grandfather in 1931. And by 1939 he owned a nice real estate portfolio.

After the original quote, I went on a google search to find, housing prices have declined already, it wasn't as easy as I thought it would be to get hits.
With plenty of quotes, saying real estate prices will take off as interest rates drop. So, there is that!

 

[hmeyernj]

We bought our daughter a dental education, ($300k), I want to play catch up with our son, and will probably buy him a house.

He is 29 and living back at home, long story short, He moved home to say good by, was planning to get married to a Canadian and move there, Covid hit, no travel, over time the engagement was called off. He's still home, and I'm enjoying it, but he wants to get out on his own.

I'm telling him it is not the time to buy, interest rates are high and house prices are high. He's doing well, saving well over 50% of his income, I'm telling him stay and keep piling up money. He has looked into apartments and it would be more than $25k a year to be on his own. I tell him hang in a couple more years. That's $50k+ more you will have.

When the time comes, I'm trying to figure out the best way to get him in a house, I could just buy the house and give it to him, I could have him get the mortgage and then we could gift him $17k or $34k a yr to pay his mortgage. I'm sure there are other options.

I'm not willing to entertain, we should not buy him a home. We want to.

We have a son and daughter, upon them completing College, they each searched for an appropriate Condominium/townhouse property/unit. In leu of paying rent, wife and I funded a private mortgage for each of them for their purchasing of the townhouse. A private family financed mortgage can use US gov’t published FRA lowest rate which is listed by the US govt monthly. I created all the mortgage paperwork , notarized, etc. Upon their purchasing their townhouse they were paying me a monthly mortgage payment including that small FRA rate interest. Annually, each were gifted 30K (representing my wife and me max annual nontaxable gifting) each by reflecting a reduction of remaining mtge balance. They each paid down their remaining mortgage over approx 5+ years and had no remaining balance when they sold their townhouses to purchase their own homes on their own.

 

[cathy63]

Do they pay rent and are you declaring the income? The IRS expects you to claim a fair market income weather they are paying you or not. Best of luck.

Do you have an actual citation for this? There's nothing I can find in the tax law that says you will have imputed income if you allow a family member to live for free in a home you own (or in a room in your home, or in a mother-in-law apartment over your garage).

Some people do say you should file a gift tax return if the fair market value of the rent would be more than the gift tax exclusion, which is $17K per donor-donee pair this year. The Wineman v. Commisisoner case is often cited as a basis for this opinion. But unless you've given away $12.9M during your lifetime, no actual tax is owed.

 

[ncbill]

Do you have an actual citation for this? There's nothing I can find in the tax law that says you will have imputed income if you allow a family member to live for free in a home you own (or in a room in your home, or in a mother-in-law apartment over your garage).

Some people do say you should file a gift tax return if the fair market value of the rent would be more than the gift tax exclusion, which is $17K per donor-donee pair this year. The Wineman v. Commisisoner case is often cited as a basis for this opinion. But unless you've given away $12.9M during your lifetime, no actual tax is owed.

Yep, other posters seem to ignore the fact that the couple could give $68k to their DS & DDIL in 2023 with zero gift tax paperwork required.

I doubt the imputed rent on a "small" house would exceed the above.

There are other tax breaks as well even if you don't want to make it an outright gift.

E.g., I could write a 30-year loan for a family member with (IIRC) an interest rate less than half of the current market rate.

 

[rkser]

Our son may also buy a Condo in the HCOL area he lives in after his marriage, right now he rents a Condo with his GF.

We gift both our kids $32k yearly ($34k this year), I do not know how much he saves, invests or spends it away.

We would like to gift him at some point, (maybe when he buys his condo) the $160k which were remaining in his 529 Plan as he went to a Public School on a Scholarship.
We paid for our daughter's Medical School & Private College education.

I don't know if there is a way to keep our gifts & his inheritance stay with our son in case of their divorce ? We live in Florida.

 

[nphx]

I would facilitate the house buy and have a 1st lien releasable by me or my will or some number of years.... This seems to qualify the intent while protecting it from marital splits or equity pilfering. (if this sounds cold - my good will to ever do it again was evaporated with my nephews drama).