Home ownership is a goal for many young people, but as interest rates have risen and property prices remain high, purchasing a home has become increasingly difficult for first-time home buyers. For parents and grandparents of these homebuyers, the question of “How can we help?” will often arise. If gifting to adult children and grandchildren during your lifetime is part of your financial life plan, there are a few ways you could consider assisting with a home purchase.
Gifting for Home Purchases
You could consider gifting cash to use towards a down payment. In 2023, you are allowed to gift $17,000 to any person and have this excluded from gift tax. For example, a married couple could gift a total of $68,000 to their son and daughter-in-law ($17,000 to each, son and daughter-in-law, from both mom and dad) and not have to file a gift tax return.
If the home purchase is more than a year out, you may consider making a gift in 2023 and 2024 to maximize the amount of money that can be transferred free of gift tax.
Family Loans
With interest rates currently higher than we’ve seen in recent years on a 30-year mortgage, you may be wondering if you can loan the money to your adult child or grandchild versus having them work with a bank. A family loan would allow you to provide funding for the home purchase to your family member without having this count as a gift. We recommend consulting an attorney to ensure the loan is properly documented and meets all the legal requirements. Legal requirements could include repayment requirements, interest rate of at least the Applicable Federal Rate (which as of February 2023 was approximately 3.5% to 4.6% depending on loan structure), and other terms.
When repaying the loan, the lender (which would be you) can elect to receive interest payments as ordinary income or elect not to receive any interest and have any forgone interest considered part of an annual gift to their children.
If you would like to explore either of these options to support your loved one with a home purchase, please reach out to your Advisory Team to discuss which option works best within your financial life plan.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.
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