Buying your first home is a fond memory, but doing so by yourself can be a difficult endeavor. Many parents dream of being able to lighten any burdens they can for their children, and financially supporting your child's first real estate endeavor can be beneficial for everyone involved. As you consider purchasing property for your kids, it is important to examine the advantages of doing so in order to confidently see the task through. We’ll help you decide whether taking this step for your kids is the right direction.
“Gifting” and tax advantages
When gifting your children money to purchase their first home, a gift tax is applicable. Gift taxes are only required for funds that are not a loan and are not intended to be paid back. Gifting your children money for the down payment is incredibly helpful, as it opens them up to a smaller mortgage payment. However, mortgage lenders will request a letter specifying that the funds were indeed a gift, and they may ask for additional information to verify the funds, such as a bank statement.
As of 2023, the annual gift tax limit is $17,000. This means you can give your child up to $17,000 to purchase a home without reporting the funds to the IRS. This does not mean you will always need to pay taxes if you exceed the annual limit. Each individual has a lifetime gift limit of $12.92 million, meaning that parents can gift their children up to this amount tax-free, even if they must report the funds to the IRS. Though gifts are not tax deductible for parents, you can rest assured knowing that, under these guidelines, your child will not be faced with hefty taxes after accepting the funds.
Use the home as a rental property
Should the home be a primary residence for your child, they may rent out the property tax-free for up to 14 days per year. This is especially helpful for those who are looking to purchase a condo in Boston for school but are frequently gone during the summer.
If your child is more of a traveler and would prefer to use the home as a full-time retail property, they can benefit from certain tax deductions for running a business. Deductions cover expenses like utilities, property taxes, and repair costs. The Boston rental market tends to be hot, so purchasing a property in neighborhoods close to colleges, such as the South End, can prove extremely profitable for your children in the long run. Plus, should they decide to live in Boston full-time, they have an opportunity to do so after their tenants’ lease is up.
Build home equity over time
One of the best parts about homeownership is actually owning the home. You can gain home equity with each monthly mortgage payment. Equity is calculated by subtracting the remaining balance of your mortgage from the market value of your house. If you have loaned your children the money to buy a house and serve as an investor in the property, you are entitled to a percentage of the equity. Though, if you prefer to keep any donated funds as a gift, your child may use their equity as a line of credit. As homeowners, your children can borrow money against the home when needed.
Helping your child build equity is simple. You can assist them with a larger downpayment to lower monthly mortgage payments, refinance the loan for a short period, and save as much as 5% on your loan by paying for closing costs upfront. These steps will help your children avoid any home-related financial pitfalls, which can be beneficial for your wallet as well.
Monthly payment stability
Renting a home can subject your child to volatile monthly payments. With a fixed-interest mortgage, they know exactly how much the mortgage payment will be for the entirety of the loan. This is helpful for children who are new to homeownership, as it allows them to properly budget for the next few years.
If your child is renting a property, they are only locked into the monthly rental rate for the life of the current lease, which tends to be a year for most properties. There is no legal limit for rent increases, so the monthly payment can potentially increase by $500 to $1,000 or even more if they renew. Therefore, buying a home for your children and allowing them to repay you or assisting with the downpayment and giving them an opportunity to secure a smaller mortgage payment is a financially beneficial option.
Buying a home for your children FAQs
How do I know when I am ready to purchase a home for my children?
You will know when you are ready to purchase a home for your children when your finances are up to the task. This means checking your credit, investments, and general financial health to ensure a gift of any kind will not negatively impact you in the long run. It is also important to make sure your children are in a responsible position to take on homeownership. Discuss your expectations with them before gifting any money, co-signing a loan, or taking out another mortgage in your name.
This is my child’s first home. Should I co-own the home with them?
This is a good idea for parents who want to give their children independence but would prefer to have some equity in the home as well. For young adults, this may be helpful, as it shows them the ropes of homeownership without putting the full burden on them.
We’ll help you find your footing
Unsure of how to proceed in the Boston real estate market? Having trouble deciding how to finance your house? Homeownership is tricky, and a good real estate agent is there to assist you during every step of the buying process.
Tracy Shea will help you navigate your budget and financial goals while exploring beautiful homes for sale in Boston. As the president of the Charlestown Mothers Association, Tracy knows how important it is to set your children up for success. Contact Tracy today to see how you and your children can benefit from owning a home in 2023!
