A Parent’s Guide to Helping Your Child Buy or Acquire a Home

Questions: How will gifting a large sum affect my financial goals? Can I gift a large amount without triggering gift taxes?

Helping your child with a down payment or the entire purchase of a home can be incredibly generous and open doors they might not be able to open independently. But before you cut a check, it's worthwhile to understand how the gift affects your balance sheet and long-term objectives. Moving a large amount of liquidity off the balance sheet could affect the projected success of any financial or retirement plan, and may result in a taxable event, depending on where the down payment will originate from.

For instance, if investments need to be liquidated within a taxable account to gift the sum necessary to the child, capital gains tax may be incurred to do so. If the amount needed is projected to come from a tax deferred retirement account, the distribution will incur ordinary income tax, and we would not recommend such a transaction, especially if the distribution will catapult you into higher tax brackets for the year of the distribution.

Carefully considering the balance sheet and types of resources you have is prudent in understanding the general pecking order of where to create liquidity, if there isn’t enough cash available to cover the gift. Such assets such as home equity and Roth IRAs can be contemplated as well, although sometimes these types of assets can already be earmarked for other critical planning objectives. If it has been established through careful planning that a large gift is justified and you are comfortable with how the financial plan looks after the transaction, there are further elements of gifting to consider.

For 2025, the IRS allows individuals to gift up to $19,000 per recipient per year, or $38,000 for married couples, without using their lifetime gift tax exemption. You can double this $38,000 to $76,000 in 2025, if the recipients of the gift are also spouses. If you plan to give more than this amount, the excess counts against your lifetime exemption—currently $13.99 million per person ($27.98 million for married couples). This is the amount you can gift without paying any gift tax during life or estate tax at death. While the amount gifted might seem insignificant compared to the current available exemption, it can impact future estate planning, especially if the exemption is reduced in the future.

Here is an example: Let’s say you gift $200,000 to help your daughter and son-in-law buy their first home. If you and your spouse split the gift, $76,000 is excluded, and the remaining $124,000 reduces your lifetime exemption amount and is tracked by the IRS on a gift tax return (Form 709). Reportable gifts are added up over time, and if the aggregate amount of gifting exceeds the available exemption threshold when you pass away, estate tax will be due at an approximately 40% tax rate for assets conveyed above the exemption threshold. Although the lifetime exemption amount available now is significant, it can be reduced through future legislation, so it is something worth monitoring for higher net worth individuals. 

What to Consider:

• Talk to your Boulder financial advisor about how gifting might impact your long-term projections for retirement cash flow, and whether gifting will impact the ability to deal with unforeseen or unplanned for events during retirement.
  
• If you plan to gift a down payment that will require a conventional mortgage, plan to document the gift for mortgage underwriting purposes with a formal gift letter stating no repayment is required. Also plan to file a 709 Gift Tax Return if the gift exceeds the available annual exclusion amount.
  
• If you decide to gift funds and plan to help other children in the future, balance the need for fairness with what’s financially realistic based on your projected balance sheet in the future. 

Peak Tip: Beyond the potential tax implications, consider your overall retirement plan. Can you afford the gift without adjusting your goals or increasing your risk? How will taking liquidity off the balance sheet affect future cash flow? Working with a financial advisor can help you give with confidence, without shortchanging your future.

Questions: Why would I want to loan money versus gift money? Do I have to charge interest on a family loan?

Loaning money instead of gifting can be part of a plan to bestow financial accountability. Receiving the money back can be a necessary part of a financial plan constructed by your Peak Financial Planner. Maybe the plan doesn’t support multiple gifts of $100K or more to all of your children, so receiving the money back as a loan results in maintaining equality desired among siblings. For higher net worth clients, loaning money now versus gifting results in not having to utilize any lifetime exemption during the transaction, and the forgiveness of future loan payments might be covered by annual exclusion amounts. 

Whatever the purpose for loaning the down payment or full purchase price, you must charge interest on a family loan. The IRS sets minimum interest rates applicable to familial transactions called Applicable Federal Rates (AFRs). These rates are updated monthly and vary depending on the loan term and compounding period. If you don’t charge at least the minimum rate set forth in these monthly publications, the IRS may treat part of the loan as a gift, which could trigger tax reporting requirements and reduce your lifetime exemption. The good news is that these rates can be considerably less than current market mortgage rates.

To formalize and manage the terms of the arrangement, the agreement should be put in writing. A signed promissory note should outline the loan amount, repayment terms, interest rate, duration, and collateral involved. If the home is used as security for the loan, it will need to be recorded like a standard mortgage. If conventional lending is still needed, the debt could be considered in a lender’s underwriting calculations, which may impact approval. If recorded against the property, the loan between parent and child may also need to be subordinated with the conventional mortgage so the traditional lender is protected in case of a foreclosure. 

What to Think About:

• A promissory note outlining the repayment terms needs to be executed for both accountability reasons and for record-keeping purposes.
  
• Consider securing the loan with a lien on the property, especially if the loan is substantial and you feel protection is warranted. Please note, however, that if conventional financing is needed, securing your loan against the property might be a hurdle in your child purchasing the property.
  
• Understand the current Applicable Federal Rates and what rate is applicable to the loan you are creating between yourself and your child. Be aware of the complications of the child not paying the loan back or missing payments, including the IRS concluding the loan is a gift and not actually a loan.

Peak Tip: Family loans can add complexity to both your balance sheet and your relationship with your child. If your child misses payments, it can create tension—or worse, financial consequences for your financial plan and the IRS. Before loaning money, speak with a financial planner in Boulder to review your resources and cash flow so you understand how such a strategy works holistically.

Questions: Will co-signing affect my credit? If I co-borrow with my child to assist in acquiring a property, what considerations are important to understand?

If credit, borrowing history, or debt-to-income ratios are issues for the child in purchasing a property, co-signing or co-borrowing a mortgage with a parent might be a solution. If you are added to the application, a lender will consider your credit, income and debt levels during the approval process, and this can result in better overall loan terms. If co-signing becomes an option, the mortgage will be listed on your credit report as if it’s your own. If your child makes late payments—or misses one entirely—it can negatively affect your credit score. Even if payments are made on time, the additional debt could impact your ability to qualify for new loans or refinance existing ones in the future.

Co-signing for a mortgage also means you are responsible for the debt if your child can’t pay. This is a legal responsibility, even though you do not have any ownership interest in the property. Because there is significant risk in this arrangement, it is important to understand your child’s propensity to pay the mortgage and whether you are comfortable taking on such a risk, especially if you are nearing retirement.

In a co-borrowing scenario, you are equally responsible for the loan, and the lender will consider your credit, income, and debt levels during the underwriting process, the same as if you were co-signing. The big difference here is that you will have an ownership interest in the property after closing. Both you and the child will share equally in the gain or loss of the property itself, as well as the liability associated with the loan.

Co-owning real estate between family members introduces complexities in how to own and manage the property, taxation, and estate and financial planning. Understanding the different types of ownership, who will be responsible for the various aspects of the property, and the exit strategy will be critical, and should be codified in a well-drafted operating agreement between parent and child. Such an agreement can prevent disputes, facilitate smooth decision-making, provide asset protection, and can provide a clear path for dissolution of the arrangement in the future. 

What to Consider:

• Adding new debt to your balance sheet may affect your ability to refinance a mortgage or add future debt. It may also add liability risk that you may not be willing to shoulder if you are nearing retirement.
  
• Understand the difference between co-signing and co-borrowing a mortgage, and prefer co-borrowing because of the ability to own the subject property. In either arrangement, you will be equally responsible for the debt.
  
• If you co-own the property with your child, an agreement should be drafted that will address the details of the arrangement. Make sure the agreement is comprehensive and considers how decisions are made regarding the property and details an exit strategy.

Peak Tip: You have the ability to own the property with your child as Joint Tenants with Rights of Survivorship or Tenants in Common. Each of these forms of ownership will have legal and estate planning implications to know and consider. Before agreeing to co-sign or co-borrow, sit down with your financial advisor, a CPA, and an estate attorney to understand what it means for your credit, your retirement goals, your tax situation, and your legal exposure.

Questions: What are some advantages to buying the home yourself and renting it to your child? What are some common strategies to transition a second home to a child?

It’s possible your adult child will not be able to acquire a property on their own, even if you gift or loan the money needed for a downpayment. You may not feel comfortable with the risk involved in co-signing or co-borrowing on a mortgage with your child. Acquiring the property on your own and entering into a legal arrangement with your child allows you to be in complete control of the circumstances. You maintain full ownership of the property, decide how it’s used, and can structure the arrangement to fit your long-term goals. If the home increases in value, that appreciation belongs to you, unless you decide otherwise in a formal agreement. You can also sell the property if the arrangement does not provide the results you want, rent it to someone else if your child is unable to pay rent, or gift it later to the child when the timing is right. You also get the tax benefits of treating the property like a business venture. Any net rental income will be included as income on your tax return, but you also get to deduct real estate business expenses, such as mortgage interest, repairs and renovation costs, depreciation and operating expenses.  

If you plan to treat the home as a rental property, an entity should be formed and the property should be owned by this entity for asset protection reasons. The arrangement should be formalized with a signed lease agreement, dictating the need for a security deposit and a fair market rent rate, and who will be responsible for the various expenses associated with the property.

If your long-term goal is for your child to eventually own the property, there are some strategies that may be appealing to transition ownership to your child over time. In a contract-for-deed arrangement, the buyer (child) gains equitable title, but not legal title until the buyer satisfies the contract in full. Any missed payments can void the agreement, so it keeps the seller (parent) in control of the arrangement. These agreements are a form of seller financing that typically last between 5 and 10 years with a balloon payment due at the end of the term. This is where the child will acquire financing to pay off the parent in full and the child will own the property with a traditional mortgage on the property.

As an alternative, a rent-to-own agreement has the child paying rent to the parent, with the child gaining an option to purchase at some point in the future. Here the ownership transfer is delayed until the option is exercised, and a portion of the rent paid can be used as a down payment to purchase. This type of arrangement is less formal than a contract-for-deed, but can still be an effective exit strategy to deploy by the parent.  

What to Consider:

• A second home owned solely by you can provide control and tax benefits if treated like a rental property. But it typically requires a larger down payment (10% to 20%+) and may result in a higher mortgage interest rate than what might be applicable involving a mortgage acquired to purchase a primary residence. The investment property is an asset on the balance sheet that can appreciate, provide rental income and tax benefits, but it can also be a burden to manage and present additional risk. Understand all of the associated risks upfront before becoming a landlord. 
  
• When renting the property to your child, you must treat the arrangement as a business enterprise, which can involve forming an entity to own the property, charging a fair market rent rate, creating a comprehensive lease agreement, reporting net rent income and taking appropriate tax deductions.
  
• Knowing your exit strategy upfront, whether it involves a contract-for-deed, rent-to-own agreement, or some other arrangement, is critical to the success of the venture. The exit strategy can be of paramount importance to your financial and legacy plan, especially if liquidating the investment property is crucial to the success of your financial plan.

Peak Tip: There are many ways to own a property, including outright, in a trust, or in an LLC or partnership. Consulting with Peak and an experienced tax advisor to review the pros and cons of the various types of property ownership is an important step, especially when it comes to maximizing tax efficiencies, understanding the effect of ownership on estate planning, and how entity formation and use can provide a layer of asset protection.

Question: How does a Qualified Personal Residence Trust work and when would it make sense for me to utilize this option?

When it comes to more creative complex options, a Qualified Personal Residence Trust (QPRT) might work to accomplish several objectives for a parent with significant wealth. A QPRT is a type of trust that can organize the transfer of a property over time at a reduced gift valuation, allowing the parent to continue to utilize the property for a certain term. The real estate to be transferred can be a homestead, a second home, vacation or investment property, and once the gift of property into the trust has taken place, all of the future appreciation is removed from the parent’s estate. After the designated term within the trust has ended, the parent could use the property but would have to pay rent to the trust for continued use. The trust could also dissolve at the end of the term, and the interest in the home could pass to the beneficiary child.

Besides the benefit of reducing potential estate tax exposure by minimizing the amount of lifetime exemption used on the transfer and removing future appreciation of the property from the parent’s estate, the trust also organizes the arrangement and dictates the terms, so all details are set in stone. If the real estate is a homestead or vacation property, the parent could continue to use the property at no cost for the term set forth in the trust, which typically is several years from the date of transfer. Thus, although this strategy is often used to minimize estate taxes, it can also be part of a broader plan to help your child with acquiring a house in the future.

This is a complex arrangement with some potential downside outcomes and risks. Although removing the property can result in significant estate tax savings, the parent loses the step up in basis associated with the property, which means the adult child will receive the property with a basis that will carry over. If they then sell the property in the future, there may be capital gains tax exposure. There is also the risk the transferring parent will die during the term set forth in the trust agreement – if this takes place, the entire value of the property will return to the balance sheet and become part of the estate, resulting in the entire process being nullified.

What to Know:

• A QPRT can make sense for a high-net-worth individual who will likely have estate tax liability when they pass away. It can reduce the amount of lifetime exemption used to transfer the asset, allows all growth associated with the property to take place outside of the parent’s balance sheet, and can allow the parent to continue to use the property for a period of time post-transfer.
• The term in the trust is critically important to navigating the QPRT to a successful result – if the term is too long, there is risk the parent will pass away during the term and the entire trust was all for naught. If the term is too short, the retained interest in the property decreases, and the gift will use more of the lifetime exemption available. The older the parent, the increase in mortality risk associated with the transaction.
• A QPRT can offer a combination of tax efficiency, control and continued use. But it should only be utilized with a full understanding of how it functions and the potential risks associated with the strategy.

Peak Tip: Understanding your potential estate tax exposure is the first step in deploying this type of tactic. It is also important to know how transferring such an asset will affect your balance sheet, and if it is an investment property, how it will reduce your cash flow. Modeling out such a transfer is the best way to understand how it works and how it can alter or influence your financial plan. These are complex strategies that require advanced planning and coordination with your estate attorney and Boulder CFP® professional.

Question: How will gifting a down payment, the entire purchase price or real estate now affect my estate and legacy planning goals?

In a real estate market that has been increasingly difficult to enter for first time homebuyers, some parents may be in the financial position to assist their adult child in purchasing or acquiring real estate. But parents need to consider how the gift or transfer will affect their overall objectives and family harmony.

Assessing how the liquidation of investments or transfer of cash will affect their financial and retirement plan first and foremost is critical. Removing assets will have long-term reverberations both on net worth and cash flow, and could result in some untended tax ramifications. For example, if cash or brokerage account assets are removed via gifting leaving a larger percentage of the balance sheet assets in the form of tax deferred retirement assets, larger distributions from these retirement accounts may need to take place to manage the budget now and/or in the future, resulting in potentially higher tax brackets and taxes (as distributions from these accounts are taken at ordinary income tax rates). But if there is cash and/or investments in brokerage accounts to supplement cash flow needs, having this separate bucket of liquidity can be effective in limiting the tax hit when regular inflows do not cover outflows. A comprehensive financial plan can assist in illustrating these results.

Before a parent gifts cash or transfers real estate, they should make the determination of whether the gift is considered an advancement on the recipient’s inheritance or an outright gift outside of the estate, then update their Will or Living Trust accordingly. Without clarification, this uncertainty could create conflict among heirs, especially if there is presumed unfairness or special treatment claimed by siblings. If the parent has structured a loan to the child to help purchase real estate, the Will or Living Trust should be updated to specify whether the loan will be forgiven by the estate, and how this should be accounted for on the estate balance sheet. Uncertainty can beget animosity, and this can last a lifetime after your passing unless handled while you are living.

It is also recommended the parent have a plan for other children, if equality is important. If gifting a down payment is the plan for one child, can the parent afford to gift to the other children equal amounts of cash or property, if they plan to balance out this initial gift? It is critically important to be clear and transparent regarding the overall objectives and then run models and projections ahead of gifting to make sure you are not put in a compromising situation with other children that can strain relationships. 

What to Consider:

• Your estate planning documents should be updated to reflect gifts and loans so presumed unfairness felt or claimed by other heirs is avoided. 
• Assuming you plan to gift an equal amount of cash or property to all children, make sure your financial plan can absorb the loss of cash or property. Make sure such gifts do not affect your other objectives, such as your ability to retire when you would like, or your ability to afford long-term care, assuming there might be a need for this in the future.
• Conduct family meetings to disclose transfers and intent, and/or have a letter of intent drafted to explain objectives and intentions behind gifts or loans. Although not enforceable as a legal document, the details of such a letter can provide clarity among heirs. This can go a long way to avoid long-term conflict among your children.

Peak Tip: Estate planning documents need to be updated by your attorney when it comes to the equalization of gifts, or accounting for a loan, but the process should start prior to the gift with your financial advisor professional here in Boulder, who will be able to assess what size of gift is prudent based on your balance sheet and budget.