May 23, 2014 3 Ways to Help Your Kids Buy a House
I feel like we have the best clients in the country. They are always looking for ways to help out their family. Many spent years saving for their kids’ college, helped plan and pay for a wedding and want to give them that last push into the adult financial world by helping them with a home purchase. Helping your children with home ownership is a great way to potentially take a portion of the assets out of your estate and transfer it into a growing asset on you children’s financial statement. Depending on your financial fitness, your kids follow through and your tax bracket, there is more than one way to help with a home purchase. This is by no means an exhaustive list, but we are going to look at three ways you can help by either gifting the down payment, buying the house with a lease purchase option or becoming the lender of choice.
You could just give your kids money towards the down payment. This may be the easiest, especially if they already have some funds set aside and you are just helping out. Gifting in this manner gets the entire asset out of your estate and helps your kids build their net worth. They can expect to need at least 10% of the purchase price to buy a home, but 20% helps avoid Mortgage Insurance. This type of gift is different than a loan, so you need to make sure that you are not giving more than you can afford to be without. Make sure to consult your CPA or financial advisor to find out if you should file a gift tax return to properly document the gift for tax purposes.
It is also possible to buy the house yourself and prepare a lease with a purchase option. You will basically be leasing the home to your kids with an option in the future for them to buy it at a set price. You can credit part of this payment, or any improvements towards their down payment. This has the benefit of letting them earn their down payment. It is best to pay cash for the entire market value of the home as you don’t want to sell something that isn’t really yours yet. You will need to consult with an attorney to make sure that the paperwork is drawn up properly. This takes more capital than gifting them the down payment, but if your kids don’t take to home ownership, and choose not to exercise the option, you retain the home which could be sold or used it as a rental. This option can be extremely helpful if you aren’t quite sure about your child’s choice of a significant other. If it doesn’t work out, there is no asset to split.
The last option we are going to look at is entering the world of banking. You could draw up a mortgage contract and let them make payments to you. Bear in mind that under this type of agreement you will have to draw up and file the contract and must enforce all the provisions of the contract. You have the ability to set a low interest rate, make interest only options or even defer payments for a year to help your kids get started. If you are not willing or able to lock up the funds for a long time, you can also include a balloon payment in 1-5 years. This will give them a timeline to get their own conventional financing and free up the capital. Again, if they don’t take to home ownership, you can foreclose or get a deed in lieu to take the house over. After that, you can sell the home or retain as a rental.
Home ownership can help give your kids the footing financially to achieve the financial independency you have always dreamed for them. Helping them can also give you the ability to spend money on what you really want to…..grandchildren. This entry doesn’t allow me to get into great detail of the legal and tax implications so before adopting any one of these strategies you should consult with your attorney, accountant and a qualified financial advisor.
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