Money Monday: Financing for Full Nesters

Juvenile Blue Tit (Cyanistes Caerules) fledging from nest box in Lechlade, UK
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One of the economic realities of today is the inability of young people to purchase their first home. With increased inflation and high interest rates, the price of affordable homes have become more of a dream than a reality for many young buyers. According to the National Association of Realtors, last year the median age of home buyers was 53 years old. Further, increasing numbers of adults have never left home, and more than 30% of young adults have returned to live with their parents due to rising cost of purchasing a home and trying to save to acquire one. Instead of empty nests, many nests are quite full these days. This raises a question as to how parents can assist their children in purchasing a new home.

The Talk

If parents are going to provide assistance to their children in purchasing a home they need to discuss the matter openly and transparently. Nothing ruins family relationships like money! Pitfalls around the idea of adult children living at home are many.  Communicating openly, and in advance may spare these relationships. Parents have to discuss providing a loan to one or more children with each of their siblings and perhaps even in-laws. It does not matter if the loan is small or large, such financial decisions can result in resentment.

Loans or Mortgages

Parents can provide intra-family mortgage loans to children with lower interest rates than that of conventional banks and lending institutions. Mortgage loans to your children can turn out to be a win-win because the borrower (the adult child) pays a lower rate than conventional lenders and the parental lenders receive mortgage interest payment income at a rate higher than if they retained their money in a traditional bank account, or 30 year investment.

The first step in the process is for the child to get prequalified for a mortgage using the conventional method. This information can provide a roadmap for how parents should structure loan arrangements with their children. If the our prospective borrower is denied a mortgage from a conventional source, the information obtained is still useful. The information can be used for these family members to structure their loan arrangements.

In drafting a written loan agreement with children, or even other family members, parents should approach the transaction from a worst case scenario. What if the borrower cannot follow through on the mortgage payments, would the parent foreclose on the house? If so, the borrower would have to sell the house to repay the mortgage loan made by the parents.

There are additional factors to consider, such as taxes. The Internal Revenue Service (IRS) requires you to charge an interest rate equal to or above the Applicable Federal Rate (AFR) at the time of the loan, when the loan amounts exceeds $10,000.

Another factor is to consider is that the borrower can only deduct the mortgage interest, if he or she itemizes deductions on their tax returns, to the extent that the mortgage loan is recorded with the local jurisdiction register of deeds.

When a Mortgage Loan Is Untenable

If making a mortgage loan to your children is not an option and you want to help them out, you can consider giving your children the house down payment as a gift. Without incurring any gift tax implications, each parent can provide a gift in the amount of $17,000 per child for 2023. In other words, a couple can provide up to $34,000 per child for this year if they want to keep the IRS out of their life.

Finally, while there may be other options to help your children purchase their home, I would not suggest co-signing or other options.

THAT’S WHAT’S UP!

Let’s make a deal in April. This month stores such as Home Depot, Target and Lowes will offer deals on gardening products. You should expect deals on live plants, herb and vegetable seeds and growing kits. Get into the Spring season and start gardening. And that’s what’s up!

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2023. All Rights Reserved.

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