Buying a first home is often considered a rite of passage for young adults. But as housing prices skyrocketed over the past decade—followed more recently by rising mortgage rates—first-time buyers have had difficulty breaking into the market.
Giving your child a leg up for a first-time purchase or helping them upgrade to a larger home as their family grows can offer multiple benefits, says Tamara Costa, vice president, advanced planning at Fidelity. “It can accomplish several objectives, including wealth transfer for estate tax savings purposes in a manner that could have significant financial impact for the child, along with instilling a sense of responsibility,” Costa explains. But it's important to consider your own financial plans, the risk of incurring unnecessary taxes, and if you have multiple children, fairness and family dynamics. Below, Costa outlines potential benefits and considerations of 4 common approaches.
1. Gift your child a down payment
Especially for younger buyers, coming up with a down payment may be the biggest hurdle to buying a home. But even if your child has savings of their own, there are reasons to consider helping out. In a competitive housing market, having a bigger down payment can make them more attractive as buyers. A larger down payment also might help your child qualify for a lower mortgage rate.
The biggest issue to watch for is the gift tax. You can give any person up to $17,000 a year in 2023 without triggering gift taxes, and if both parents make an individual gift, that total can be as much as $34,000 per child. If you go over your annual gift tax exclusion, “you don’t write a check to the IRS,” explains Costa. Rather, the excess reduces your lifetime gift exemption, which is $12.92 million per person (or $25.84 million for a couple) for 2023.