Wealth Building 101: Can I Gift My Child Money Towards a Purchase of Their Home?
Many of our clients ask if they can give money to their children to help them purchase a home. The short answer is “yes.”Helping your child buy their first home may be a kind act to help them start building wealth and establishing financial stability. However, there are some financial and legal considerations involved with gifting money toward a home purchase. Here is what you should know to smooth the way for your gift and ensure it benefits your child without any unexpected complications.
Can You Gift Money for a Home Purchase?
You can give your child a gift of money for a home purchase. This is a common occurrence, as parents often want to ease the financial burden of buying a house-which many times can be realized with the down payment itself. Exactly how that gift is treated, however, impacts you and your child financially, so some strategic planning may be in order.
Key Considerations for Gifting
Gift Limits and Taxes
As of 2023, you are allowed to gift up to $17,000 per recipient per year without triggering the gift taxes. In a case where you are married, you and your spouse are capable of jointly gifting as much as $34,000 to your child. If your gifts exceed that limit, you will have to file a gift tax return but it doesn't necessarily mean you owe taxes as part of your lifetime exemption, which currently stands at $12.92 million per person.
Lender Requirements
Lenders will often require a gift letter where funds are to be used as the down payment. This letter needs to indicate it is a gift and repayment of this money on behalf of the recipient is not required. A lender might also request proof of the transfer and documentation of where the money has originated.Impact on Your Finances
Before gifting a large sum, consider how it might affect your financial goals, retirement savings, and tax situation. Ensure that the gift won’t strain your own long-term plans.
How to Gift Money Wisely
Set Clear Expectations: Discuss with your child how the gift will be used and ensure they understand any lender requirements.
Document the Gift: Prepare a formal gift letter to avoid misunderstandings with the lender or tax authorities.
Consider Timing: If you plan to give a large sum, splitting the gift over multiple years can help avoid exceeding annual tax-free limits.
A Thoughtful Way to Build Wealth
Helping your child buy into a house is a great way to invest in his or her financial future. It can provide stability, and the ability to build equity and put them on a path to building wealth. With knowledge of the rules that surround gifting and careful planning, you can make it a seamless, comfortable process for all parties involved.
Want to discuss ways to accessing funds to help your children buy a home? Get in touch.