Buying a House for Kids an Option for Sharing Wealth

By Larry Green, Vice President at Park National Bank

Have you considered buying a house for your children? More parents of adult children are doing so, as a smart way to transfer wealth.

Considering the recent volatile stock market and low interest rates, residential real estate may look like a better investment.

So why not invest in real estate and your children? Isn’t it better to have them pay rent to you than to an unknown landlord?

Buying a house for your adult children can be a strategy that benefits both you and your children. The key to doing it right is working with a financial professional with the experience and expertise to know all the rules and tools available and who can help you develop a plan that is best for your family in the long run. There are several reasons residential real estate can be a successful means of passing on wealth.

Here’s a look at some of them:

Provide the down payment in your child’s purchase of the home

This could be an opportunity to shift wealth to your children without gift or estate tax cost. Transferring your wealth in this way is a great way to help your children purchase the comfortable home they want and need. Plus, it has positive effects on your own finances.

By law, your annual gift tax exclusion enables you to make a cash gift up to $11,000 each year to one person, free of gift tax.

As a couple, you and your spouse can gift $22,000 to each of your children, and if the child is married, an additional $22,000 may be given to the son-in-law or daughter-in-law.

That $44,000 could provide a substantial down payment on a home, making their mortgage much smaller. Plus, you have transferred $44,000 to the next generation and reduced your taxable estate by that amount.

It is difficult for most children to save sufficient funds to purchase a comfortable home. Why not help them when they need it to fulfill the dream of owning a home instead of paying rent?

Another alternative is for parents to act as the mortgage lender, loaning their child the balance needed to buy the house.

You would be required to charge interest on the loan at applicable federal rates, but these rates are usually somewhat lower than commercially available mortgages. The lower rate will save the child money over the life of the loan.

If you wish to make annual gifts to your child, you can do so by forgiving or reducing the mortgage each year by the amount of their annual gift.

This benefits the parents by reducing their taxable estate and it helps the child by reducing their overall indebtedness. With this approach, the deduction for real estate taxes and mortgage interest payments will be taken by the child, not the parents.

The house will not be included in the estate of either of the parents, other than the mortgage balance. All appreciation in the house’s value will accrue to the child free of transfer taxes.

When the child sells the house, they may get the benefit of the exclusion from income of the gain from a sale of a principal residence, giving them more value as they trade up to larger homes for growing families.

Often parents feel most confident in this method by having their trust account be the mortgage lender, loaning the funds from their personal trust. In this case, the trustee is responsible for collecting the mortgage payments. The trustee may be an independent trustee or it may be the parent.

At the death of the parents or when the trust terminates, the mortgage note can be distributed outright to the children, thereby giving them their home free and clear. The price of homes today is ever-increasing.

Transferring your wealth in this way is a great way to help your children purchase the comfortable home they want and need. Plus, it has positive effects on your own finances.

By using your gifting and trust to help them acquire their home, you are assuring that the gift will be used to increase their assets, and it sets them up for advantageous financial options for many years to come.

Larry Green is a vice president at Park National Bank who works with trusts and estate planning. Reach him at 614-228-3447 or lgreen@parknationalbank.com.

This article appeared in Business First on July 9, 2004

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