Should You Gift a Down Payment or the Entire Purchase Price to Your Child?

Buying a first home is one of the biggest milestones in life, and as a parent, you may want to help make it happen for your child. One common question is whether you should help by gifting a down payment or covering the entire purchase price.

The cost of entry is exceedingly high for first-time homebuyers attempting to become homeowners today. Home ownership for many younger generations could remain permanently out of reach without assistance. Many parents have become particularly active in assisting their children with the down payment needed to buy a house and have reasonable monthly mortgage payments. 

Gifting a down payment or even the full purchase price of a home can be incredibly helpful to an adult child who may not have the means to save for such a purchase.

In this article, we’ll explore financial and tax considerations so you can decide what’s best for you and your family. We’ll also take a closer look at how to support your child’s home purchase responsibly.

Plan Before You Leap

While helping your child with funds to purchase a home can provide a jumpstart to their wealth building, such a significant gift requires a well-planned approach that considers your financial health, tax implications, and requirements under the current tax code.

Providing the Down Payment for Your Child’s First Home

If you consider contributing just the down payment, this could be between 10% and 20% of the purchase price. Traditional financing will be needed for the remaining portion of the property. 

Some questions to consider:

• Will your child have the appropriate credit score to secure a mortgage of the size needed? 
• Will the interest rate be low enough and payments reasonable enough to justify the purchase?

Typically, the higher the down payment, the better the interest rate. A larger amount down also affects your child’s purchasing power-the higher the down payment, the higher the value of the house that can be bought.  

A well-structured gift of a down payment can enable loved ones to build equity, stabilize their housing, and improve their financial well-being. However, this generosity should be balanced with your financial security and awareness of possible tax implications for you.

Providing the Full Purchase Price for Your Child’s First Home

Suppose you have the means and are willing to assist with the entire house purchase. In that case, no traditional financing is needed, but moving such a large amount of liquidity off the balance sheet could require significant financial and tax planning.

Whatever the amount, you should ensure your balance sheet remains strong post-gift, especially if you are retired or nearing retirement.  

• Will there be enough liquidity to meet ongoing needs, serve outstanding liabilities, and have reserves available in an emergency? 

A large gift also shouldn’t derail financial objectives for travel, philanthropy, or other goals you want to pursue. This is where a comprehensive, holistic financial analysis can help you determine how the gift will affect the success of your financial and retirement plan. At a minimum, the plan should include:

• An analysis of rates of return and withdrawal rates
• A review of the types of assets available and the tax treatment of these assets
• An assessment of the cash flow coming in from various income sources
• A thorough review of your various discretionary and non-discretionary expenditures and liabilities 
• An examination of the applicable tax brackets and effective tax rates

Understanding the Tax Consequences and Requirements

A critical aspect of this type of gifting strategy is understanding the potential tax liability of freeing up the kind of cash needed to fund a down payment or full purchase price. There might be plenty of liquidity in your retirement accounts to help. Still, any distribution from these accounts results in an ordinary income tax hit, which would likely result in massive tax inefficiencies.

Questions like these should be discussed with a Boulder CFP ®:

• Will investments need to be sold, resulting in capital gains tax? 
• What will this rate be, and will there be enough cash to cover any tax liability arising from the year in which the sale takes place?

Once you’ve worked through the details and updated your financial plan to anticipate the gift, you need to consider and address IRS-related requirements. Each year, the tax code allows for an annual exclusion amount that can be gifted without filing a gift tax return. The amount for 2025 is $19,000 per person per individual.  

This amount can be doubled to $38,000 for spouses making gifts jointly, and again to $76,000 if the gift recipients are spouses. Any amount gifted above these levels must be reported to the IRS on a gift tax return.

This doesn’t necessarily mean any tax is due, however.  

The tax code allows you to gift approximately $14M per person ($28M for spouses) in 2025 without having to pay a gift tax. For the vast majority of people, these are levels that are not important, as they can fit their net worth easily under these thresholds. But even if you are well below these levels, the IRS still makes it a requirement to track taxable gifts made during your lifetime and at death so that if you were to breach the threshold in aggregate, they can tax you and your estate at an approximately 40% tax rate on any amount above these levels.  

So, if you make a gift during life above the annual exclusion amounts discussed above, the IRS will require the parent to file a gift tax return to “bookmark” the gift made for a particular year.  Suppose this gift, combined with previously documented gifts to the IRS, is below the large exemption amounts previously discussed. In this case, no tax is due, and the amount gifted simply reduces this overall lifetime exemption amount, which currently adjusts annually with inflation.

For example, let’s say a husband and wife want to gift a down payment to their son and daughter-in-law in 2025 after completing a comprehensive financial plan, illustrating that the gift would not jeopardize the success of their plan or their financial objectives.  

Per the annual exclusion amount, they can gift up to $76,000 and not have any of this amount count against their lifetime exemption. However, the amount needed for the down payment is $160,000, meaning an additional $84,000 is needed. This additional $84,000 must be reported on their gift tax return for 2025 (a gift of $42,000 to son and $42,000 to daughter-in-law). This would be subtracted from the lifetime exemption of approximately $27M currently available to be exempted from gift and estate tax. Again, no tax would be due unless the parents had used all of their combined lifetime exemption.

Comprehensive Financial Planning Through Peak Asset Management

Working with Peak Asset Management can help you decide whether to gift a down payment or cover the full purchase price of your child’s new home. 

As fee-only fiduciary advisors in Boulder, CO, our team prioritizes your financial well-being and brings a personalized approach to every decision. We’ll walk you through the tax implications, long-term impact on your retirement goals, and how to align the gift with your broader financial plan. 

With deep expertise and a commitment to your values, Peak ensures that helping your child doesn’t come at the expense of your financial security.

Let us know what questions you have. Contact us today.

Jason Foster, Director of Wealth Strategies and Legacy Planning

Advisory Services offered through Peak Asset Management, LLC, an SEC registered investment advisor. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This content is developed from sources believed to be providing accurate information and may have been developed and produced by a third party to provide information on a topic that may be of interest. This third party is not affiliated with Peak Asset Management.  It is not our intention to state or imply in any manner that past results are an indication of future performance. Copyright © 2025 Peak Asset Management