Possibly helping only child with first home purchase

[socca]

... What I meant by that is I would rather see her buy a nicer house with our help than buy something cheaper, smaller and older. ...

My first house was cheap, small, and old. It was what I could afford (no parental help). I was nevertheless proud of the place - it was MINE!

 

[pb4uski]

DS isn't ready yet but we have talked about an equity participation "loan". We would put up most of all of the down payment as a gift as far as the mortgage lender is concerned. He would make the mortgage payments and other costs of ownership. If he sells, we'll get out loan paid back plus a share of the gain. So if we put up 20% of the purchase cost we would get 20% of the gain and he would get 80% of the gain. So if in 10 years he sells for 150% of his initial cost then our return would be 50%, which equates to ~4.15% per annum.

 

[JohnDoe]

DS isn't ready yet but we have talked about an equity participation "loan". We would put up most of all of the down payment as a gift as far as the mortgage lender is concerned. He would make the mortgage payments and other costs of ownership. If he sells, we'll get out loan paid back plus a share of the gain. So if we put up 20% of the purchase cost we would get 20% of the gain and he would get 80% of the gain. So if in 10 years he sells for 150% of his initial cost then our return would be 50%, which equates to ~4.15% per annum.

Who drafted those documents for you?

 

[JohnDoe]

My first house was cheap, small, and old. It was what I could afford (no parental help). I was nevertheless proud of the place - it was MINE!

We did the same but housing was a lot more affordable 30 years ago and and before COVID.

 

[Alan]

I have decided to help my children buy their first home. I view it as giving them part of their inheritance early. Helping them today will be a lot more useful to them and the grandkids now, and will position them better for the future.

This is what we did.

 

[JohnDoe]

Everyone one that helped their kids, did you use after tax money?

 

[Alan]

Everyone one that helped their kids, did you use after tax money?

Yes.

 

[RetiredHappy]

Everyone one that helped their kids, did you use after tax money?

Yes.

 

[cathy63]

Everyone one that helped their kids, did you use after tax money?

Yes. The inheritance part was tax-free, but the loan was after-tax.

 

[aaronc879]

If you don't want to add to the tax hassle you and your wife can only give a total of $36K this year and $38K next year unless your daughter is married, then you could double it. You may want to give her a nice Christmas present of $36K then give the rest next year.

 

[pb4uski]

Who drafted those documents for you?

We haven't done it yet. Sorry I wasn't clearer.

In reality it would be an informal agreement. Nothing recorded or anything like that. Could he renege on the agreement? Yes, but he would be jeopardizing a lot more in inheritance.

 

[ivinsfan]

DS isn't ready yet but we have talked about an equity participation "loan". We would put up most of all of the down payment as a gift as far as the mortgage lender is concerned. He would make the mortgage payments and other costs of ownership. If he sells, we'll get out loan paid back plus a share of the gain. So if we put up 20% of the purchase cost we would get 20% of the gain and he would get 80% of the gain. So if in 10 years he sells for 150% of his initial cost then our return would be 50%, which equates to ~4.15% per annum.

In this scenario what happens if your DS actively pays for or does sweat equity to improve the selling price of the home. Would he be permitted to keep track of his expenses and get that money back upon the sale? I'm not talking "normal" expenses.

 

[JohnDoe]

If you don't want to add to the tax hassle you and your wife can only give a total of $36K this year and $38K next year unless your daughter is married, then you could double it. You may want to give her a nice Christmas present of $36K then give the rest next year.

Would it be considered a gift if it never went to her directly? If it went into escrow until settlement? I thought someone had to hold the funds until that time.

I should probably talk to my lawyer about all this and see who in their firm can talk me through some of this.

 

[pb4uski]

In this scenario what happens if your DS actively pays for or does sweat equity to improve the selling price of the home. Would he be permitted to keep track of his expenses and get that money back upon the sale? I'm not talking "normal" expenses.

I'd have no issue with that for major repairs and improvements that increase the value of the property.

Our purpose isn't to make money but more to provide a way for him to own a home without making it an outright gift... in reality if he sold we would probably gift him any profit and just take what we put in... effectively making it an interest free loan to him for all or a portion of the downpayment. We probably wouldn't have a formal agreement either... just a one pager that we would both sign. If he reneged without good reason part of his inheritance would be jeopardized so that is the stick to ensure he sticks to the deal.

 

[copyright1997reloaded]

Would it be considered a gift if it never went to her directly? If it went into escrow until settlement? I thought someone had to hold the funds until that time.

I should probably talk to my lawyer about all this and see who in their firm can talk me through some of this.

Why would you need to put it in escrow? She can just stick it in a savings or money market account. $18K from you w/a 2024 check (cashed by your daughter in 2024) and $18k check from your spouse (again cashed by your daughter in 2024). Then in January 2025 do the rest. For IRS purposes, the gift needs to be irrevocable. if the check comes from a JOINT account (you and your spouse), it can be done with one check (for each year), e.g. $36K in 2024, rest in January 2025.

 

[rodi]

My dad loaned me enough so that I could put 20% down on my first home. (I had about 10% downpayment, but didn't want to pay PMI.) This was an off-books loan, in that my mortgage company didn't know it was a loan. We had a signed note. But he was listed on the deed alongside me. The terms were that he'd match the bank's mortgage rate over a 7.5 year amortization. I suspect he didn't declare the interest income on his taxes. I didn't claim the interest payments to him on my taxes.

When I moved 2 years later and bought a home in a different state the existing loan rolled over... although rates had dropped so I proposed (and he accepted) that he match the new bank mortgage interest rate. We did not bother to put his name on my second home's deed.

I paid it off in under 5 years from the original loan.

We assume we will help our sons with their first home purchase... but since they don't graduate from college till June & Dec of 2025, we're not in a hurry to come up with the money.

 

[Earl E Retyre]

We have been kicking around the idea of being “the bank”. The kids would not take a gift of a house. So we thought that we could do a loan around 4-4.5% so that they have a lower house payment. They would still close with a title company and own the house. Not sure if we’d have to hire a lawyer for paperwork. Has anyone done this?

 

[cathy63]

We have been kicking around the idea of being “the bank”. The kids would not take a gift of a house. So we thought that we could do a loan around 4-4.5% so that they have a lower house payment. They would still close with a title company and own the house. Not sure if we’d have to hire a lawyer for paperwork. Has anyone done this?

The current long-term AFR is 4.53%, so if you did this today that's the minimum interest rate you could charge. The IRS announces new rates every month. There are companies that do these types of loans, such as National Family Mortgage, but you do pay them for setting up and servicing the loan.

If you want to do it on your own, I don't think you need a lawyer to write the paperwork if you feel comfortable thinking through and accounting for things like what happens to the loan if you die or if the kid dies or if they default. You can find example promissory notes online easily enough. If that sounds daunting, then it's probably a good idea to get an attorney involved.

If you want the escrow / title company to record a lien against the property, then they'd have to be instructed to do that as part of the closing.

 

[JohnDoe]

Why would you need to put it in escrow? She can just stick it in a savings or money market account. $18K from you w/a 2024 check (cashed by your daughter in 2024) and $18k check from your spouse (again cashed by your daughter in 2024). Then in January 2025 do the rest. For IRS purposes, the gift needs to be irrevocable. if the check comes from a JOINT account (you and your spouse), it can be done with one check (for each year), e.g. $36K in 2024, rest in January 2025.

If she attempted to purchase a house, I thought the down payment and closing costs would need to be held in escrow until closing.

My DD only has 1 account with one FI where I am actually co-owner because she opened this account when she was 16. Would it even be considered a gift If she put the money in that account? Or would she have to open an account in her name only and deposit the money there?

 

[SJhawkins]

Timely discussion, kicking around gifting this year and next year to help drive down the mortgages. They saved well over the 20% thus far

 

[camfused]

This is also timely for me, since we are thinking of buying a house for DD. She has a low paying job, and perhaps will continue to do so for the foreseeable future. She also has a disability. Therefore, we are thinking of just buying a townhouse for her. Not sure yet if buying it outright for her (and doing a form 709), or buying it ourselves (and let her live there) is the right thing to do. We have the cash to just buy it. Either way, we will probably be gifting her about $2K/month to help with expenses too. All our money will eventually be hers anyway.

It seems like letting her get a mortgage is a waste (unless we hold it), since we can afford to pay cash for the house.

Is there any way (LLC, Trust, etc) we can avoid the form 709? I suspect not.

 

[NewEnglander]

When my DW and I bought our first home we didn't have the required down payment. I made a deal with my father to borrow from him paying the same % he was getting for the money in the fixed portion of his portfolio. I think we paid him something like 5-6%. We set up a payment plan over 10 years but we were able to pay it off sooner due to increases in our income. It was a good deal for us at the time as there was no way we would have been able to buy a house without the help.

 

[Kings over Queens]

We have been kicking around the idea of being “the bank”. The kids would not take a gift of a house. So we thought that we could do a loan around 4-4.5% so that they have a lower house payment. They would still close with a title company and own the house. Not sure if we’d have to hire a lawyer for paperwork. Has anyone done this?

I've "held the paper" in commercial sales and what you ask about is the exact same thing I'm considering for our kids. Be the bank, take a nominal interest rate, only I'm considering interest only and gifting a portion of the mortgage principal back each year. Not sure how to work that part out, but the goal is to get this money of our balance sheet and onto theirs while we are all young enough to enjoy it.

 

[Car-Guy]

I realize it's not for everyone but we did buy a new home for our only child a few years ago. Nice to see the money being used to make her happy while we are still here to see it.

 

[GravitySucks]

This is also timely for me, since we are thinking of buying a house for DD. She has a low paying job, and perhaps will continue to do so for the foreseeable future. She also has a disability. Therefore, we are thinking of just buying a townhouse for her. Not sure yet if buying it outright for her (and doing a form 709), or buying it ourselves (and let her live there) is the right thing to do. We have the cash to just buy it. Either way, we will probably be gifting her about $2K/month to help with expenses too. All our money will eventually be hers anyway.

It seems like letting her get a mortgage is a waste (unless we hold it), since we can afford to pay cash for the house.

Is there any way (LLC, Trust, etc) we can avoid the form 709? I suspect not.

Form 709 took me 15 minutes to read the instructions and fill out. I have no worries about inheritance taxes though.