There was a story in the news a couple of years ago about a woman from China who paid $6.5 million for an apartment in New York City -- for her daughter ― who was two-years old. No, the tot won’t be living in it now; it will be held until she grows up and attends an American university, according to Mom.
While the child from China won’t have to worry about struggling to pay for her first home, hundreds of thousands of American first-time homebuyers do. When parents are willing and able to help, should they?
Even if you don’t have millions to plunk down on a Madison crib for your grown child, let’s take a look at some of the ways you might give what you can.
If you are worried about creating a financially dependent monster by gifting your child with a house, relax. Helping your offspring break the rental cycle or get out from under your roof may just do the opposite. It all depends, of course, on your child’s level of maturity and responsibility.
It also depends on your financial situation. Overall, an adult child that is mature and responsible may just need a leg up to get on the road to self-sufficiency. In these cases, consider your financial help an investment, Ronald J. Greer, a pastoral counselor and author, tells the Dallas News.
What kind of Help?
“Help,” when it comes to purchasing a home for your child, can take a number of forms. Like the woman from China, you can purchase a home outright and give it to your child. Consider these strategies, as well:
• Purchase the home under a share-equity agreement
• Help with the down payment and closing costs
• Loan your child the money to purchase, with a lower-than market interest rate
Let’s take a closer look at some of these alternatives.
Share the Equity
A shared equity financing agreement works well when your child has part of the money required to purchase the home. The parents come up with the rest of the money and then treat their share of the home as an investment.
Parents can deduct their part of the expenses, mortgage interest, taxes and maintenance. When the child sells the home, the parent’s investment is returned, hopefully with a profit.
The shared equity strategy is also the ideal way to avoid triggering the gift tax (35 percent on anything over $14,000). This is definitely a situation that requires the assistance of an attorney and/or accountant.
If you’re concerned about creating dependency by gifting a home to your child or want to foster responsibility, consider making a loan for either the down payment or for the purchase price.
To do it right, you’ll need to set up the loan with an official legal document, complete with repayment terms. Even if you have no intention of suing your child for non-payment, formalizing the loan will go a long way toward preparing the child for the “real world” of finance and responsibility.
Some parents charge interest on the loan – typically lower than current bank rates but higher than what that money would earn on an investment. This is something for you to work on with your accountant.
The biggest downside to lending your child the money for a down payment on a Madison home or to purchase the home outright is that the money isn’t available to you should you need it in the future.
Buy it Outright
If you have the money you may just want to purchase the home outright and gift it to the child over an extended period of time.
One scenario calls for renting the home to the child to get a tax benefit while gifting a percentage of ownership each year (to stay under the gift tax penalty) until he owns the home in its entirety.
The experts at MortgageLoan.com claim that one of the biggest benefits of this scenario is that it avoids strains in the relationship. They also suggest that you consider the purchase an advance on your child’s inheritance, helping him avoid taxes.
Whichever method you choose to use when assisting your child to purchase a home in Madison, talk it over first with your financial advisor.
Posted by Jolenta Averill on