Financial Planning: How To Help A Child Buy A Home

Financial Planning

 Sara Gelsheimer By: Sara Gelsheimer

Over the last few months, particularly as interest rates have climbed, I have had clients reach out about helping their children with purchasing a home. If this is something you’re considering, I've outlined considerations and options to help ensure your generosity doesn't de-rail your retirement plans or financial security. I have also covered the topic in a video, which can be watched here.

Background: Estate Tax Implications

Before we dive in, let’s set some groundwork. In addition to income tax, there is also an estate tax – a 40% tax assessed on assets in excess of the estate exemption amount. The exemption amount in 2023 is $12.92 million per person. This amount can be used throughout life or at death (or a combination thereof). This means as long as an individual has less than that amount (or nearly $24 million as a married couple), no estate tax would be due if they died this year.

While the estate tax exemption amount is nearly $13 million today, it is currently set to be reduced in 2026+. It is likely at that point in time, the exemption amount will be somewhere around $6-7 million per person. These amounts are important to keep in mind as you consider either gifting assets to a child for a home or loaning assets.

Let’s use an example to walk through three options. Let’s say you’d like to provide $100,000 of funds for your child to help buy a home.

Option 1: Loaning the Amount 

If you have a high likelihood of being subject to estate taxes now or down the road, this might sway you to loan funds as opposed to gifting. In order to avoid the $100,000 being deemed a gift, you must charge at least a minimum rate of interest which is determined by the Applicable Federal Rate (AFR). For January 2023, the long-term AFR is 3.85%. So if you wanted to set up a 30-year “mortgage” with your child, you would need to charge at least 3.85% interest in order to avoid using $100,000 of your estate exemption amount.

This structure is often a win-win. For the parent making the loan, they may consider using $100,000 of their fixed income (bond) portfolio since this note-receivable would act similar to a fixed income investment. This means they are “guaranteed” to receive a 3.85% return on the $100,000; and the child is receiving a long-term loan for 3.85% interest as opposed to the nearly 7% they’d likely have to pay through a traditional lender at this time. The child may also be able to deduct the interest (just like interest on a traditional mortgage) if the loan is recorded against the property. It’s also important to note that the parents must report the interest income on their taxes.

Option 2: Gifting the Amount

If lending the money is not your preference, you can also gift the $100,000. Each individual also has an “annual exclusion amount” – an amount you can gift to any individual(s) without needing to file a gift tax return or use any of your lifetime exemption amount. For 2023, this amount is $17,000/person. This means any individual can gift up to $17,000 to any other individuals and pay no gift taxes (or use any of their exemption amount). So in this example, if two parents want to gift $100,000 to their child and their child’s spouse, only $32,000 of this will actually be deemed as a gift ($17,000 x 4 = $68,000.  $100,000 - $68,000 = $32,000). Keep in mind, if you do gift the child’s spouse, this will make things more complicated should the child get divorced. The parents may decide to only make the gift to their child (thus using up more of their lifetime exemption amount). There are also some documents you may consider executing to denote how the $100,000 would be treated should a divorce occur.

Option 3:  Loan & Forgive

One final option would be lending the $100,000 and then forgiving up to the annual exclusion gift amounts each year. In the above example, you could set up a loan between your child and the child’s spouse for $100,000 and charge the minimum required 3.85% interest. Next year, assuming the annual exclusion amount is the same $17,000, you could forgive $34,000 of the loan, and continue doing so each year until the entire balance has been forgiven.

This is a good option for someone who doesn’t want to do a full gift (and use up some of their lifetime exemption amount) but also wants to help their children even more.

How to Decide

These options can vary in viability depending on your specific financial plan, so it is best to fully walk through with your financial advisor. No one wants to be surprised when gifting today has unintended consequences on your long-term financial security or simply lands you owing more than necessary.

If you're looking for resources on helping your child better understand how much they can afford when purchasing a home, check out our blog.



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Sara came to Plancorp in 2013 with a strong financial background and an even stronger commitment to financial education—particularly for women. A Wealth Manager and Founder of InspireHer (Plancorp's Women's Initiative), Sara is also a new mom. More »