Helping Your Kid Buy a Home—Before You Write the Check
by Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
December 21, 2011

Dear Carrie,

What is the best way for me to help my thirty-year-old son buy a house? I'm 64 and about to retire in the next year or so. I have enough in my retirement fund to pay for all my essentials and some extras, but I'm not wealthy. Your advice?

—A Reader

Dear Reader,

The housing boom seems like a distant memory these days, but home ownership is still a worthy aspiration—and a challenge for many first-time buyers. Parental help can be invaluable, but you're right to think through this issue before you act. So thanks for a great question!

Before You Help...
First and foremost: Be sure you're truly in a position to help. It sounds like you're well prepared for retirement but without a lot of cushion. I suggest running your own numbers again, with realistic assumptions about your income requirements and lifespan, before you speak with your son. You've worked hard to prepare for retirement, and you don't want to worry that helping your son might jeopardize your own financial security.

Assess the Situation
Let's assume you do have the resources to help. What's the best way to go about it?

First, talk with your son about the realities of home ownership, such as the true costs of buying a home. First-time buyers often focus on the mortgage payment to determine affordability, but the actual ongoing cost is much higher (insurance, property tax, and maintenance). Does he earn enough to afford all that and still live within his means? Is his job stable? Will he be able to stay in the area for several years?

Second, understand the degree of his financial need. Does he need help with the down payment or would your commitment be ongoing? Help with a down payment strikes me as reasonable; an ongoing need might make me think he's not financially ready to own a home. And—a more philosophical issue—how much should he be willing to undertake himself? Is this an opportunity for him to assert his financial independence, perhaps deferring the buying decision for a few years?

Obviously, you know your son, but getting these issues out into the open is essential—and will reinforce the idea that financial matters, with a bank or with you, are serious and have consequences.

The Form of Your Help
Now you can make some informed decisions about what kind of help you can provide. If it's strictly a matter of helping with the down payment (probably the most common form of parental assistance), you can give him $13,000 a year without triggering gift taxes (if he's married, you can make a gift to his spouse for another $13,000; if you're married, your spouse can do the same for a total of up to $52,000 gift-tax-free in any one year).

You can also lend him money for his down payment, but do it properly with documentation. A simple loan agreement outlining the interest rate and repayment schedule can circumvent any misunderstandings between you and your son. Obviously, you have to report interest received on your taxes. But unlike most personal loans, you can charge below-market rates, even as low as zero percent, without the consequences of "imputed interest," as long as the loan is $100,000 or less, is used to buy a home or start a business, and your son does not have investment income over $1,000. ("Imputed interest" refers to the interest you could have earned; it's the difference between the "applicable federal rate" and the rate you charge. Current applicable federal rates can be found at IRS.gov. If you're unsure about the tax consequences of a loan to your son, consult a tax professional to make sure you're doing it right.)

If your son's need is greater—say, for example, he needs a co-signer for his loan—you'll have some hard thinking to do. Co-signing is a legal obligation; you might be mortgaging (literally) your future for his house. Obviously, this is a hugely personal decision; know the risks and their consequences before you proceed.

There are also more complex arrangements. Some parents buy a house in their name and rent it to their child. Others share equity in the house as co-owners. Don't be afraid to get some professional help with structuring and documentation.

Clear, forthright communications will make everyone involved more comfortable.

In fact, clear, forthright communications should be critical for any substantial family transaction. Spell out the nature of your assistance in writing, and avoid a potentially ugly situation down the road. But I cannot stress enough the importance of protecting your own financial future first. It's commendable to help your children, and if doing so won't compromise you or them, I'm all for it. Good luck!

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