Can I Buy a House for My Child? Key Financial & Legal Factors

Many parents consider assisting their children with homeownership, often due to rising home prices and a desire to provide a secure foundation. This assistance involves careful consideration of various financial, tax, and legal factors that can impact both the parent and the child for years to come.

Structuring the Home Purchase

Parents have several common methods for helping a child acquire a home. One approach is a direct gift of property, where the parent transfers ownership of an existing home or a newly purchased one directly to the child, making them the sole legal owner.

Another common strategy is gifting funds to the child, typically for a down payment or the entire purchase price. This direct cash transfer allows the child to complete the home purchase in their own name, potentially reducing or eliminating their mortgage burden. Funds are usually transferred directly into the child’s bank account.

Parents might also choose to lend funds to their child for the home purchase. In this scenario, the parent acts as a private lender, providing a loan to the child under specific terms formalized with a promissory note. This note outlines the loan amount, interest rate, repayment schedule, and any collateral. A properly structured loan ensures clarity and can prevent future misunderstandings.

Co-owning the property with the child represents another option, such as joint tenancy or tenancy in common. In joint tenancy, both parent and child own the property equally, with rights of survivorship, meaning the surviving owner inherits the deceased owner’s share automatically. Tenancy in common allows for unequal ownership shares and does not include rights of survivorship, so each owner’s share can be willed to their heirs.

Finally, a parent may purchase the property outright and then allow the child to live there, often as a tenant paying rent. In this arrangement, the parent retains sole legal ownership of the property, including all associated responsibilities like mortgage payments, property taxes, and insurance. The child’s role is typically limited to that of a renter, governed by a lease agreement. This provides flexibility for the parent and can offer stability for the child without immediate ownership responsibilities.

Tax Implications for the Parent

Assisting a child with a home purchase carries several tax implications for the parent. When a parent gifts funds or property, gift tax rules apply. For 2025, an individual can gift up to $19,000 per recipient annually without triggering gift tax reporting requirements or using their lifetime gift tax exemption. This annual exclusion applies per donee, meaning a parent can give $19,000 to their child, and if married, both parents can give $19,000 each to the child, totaling $38,000 per year, without tax implications.

Gifts exceeding this annual exclusion amount necessitate filing a gift tax return (IRS Form 709), though no tax is typically due until the lifetime exemption is exhausted. The lifetime gift and estate tax exemption for an individual in 2025 is $13.99 million. Any amount gifted above the annual exclusion reduces this lifetime exemption.

If a parent lends money to a child at a low or zero interest rate, the Internal Revenue Service (IRS) may apply imputed interest rules, specifically the Applicable Federal Rates (AFR). If the loan’s interest rate is below the relevant AFR, the IRS can treat the difference between the AFR and the stated interest rate as imputed interest income to the parent for tax purposes. This means the parent could be taxed on income they did not actually receive.

Property tax deductions for the parent depend on the ownership structure. If the parent retains full or partial ownership, they may be eligible to deduct their share of property taxes paid on the home, subject to general itemized deduction limitations. This deduction, however, is subject to the state and local tax (SALT) deduction limitation, which caps the total deduction for state and local income, sales, and property taxes at $10,000 per household annually.

Capital gains tax implications arise if the parent retains ownership or co-ownership and the property is later sold at a profit. The parent would be subject to capital gains tax on their share of the appreciation. If the property was not the parent’s primary residence, the entire gain attributable to their share would be taxable. However, if the home was the parent’s primary residence for at least two of the five years leading up to the sale, they might qualify for the Section 121 exclusion, allowing them to exclude up to $250,000 of gain ($500,000 for married couples filing jointly).

Tax Implications for the Child

The child’s tax situation also changes depending on how they acquire the home from their parent. One significant factor is the basis of the property, which is crucial for calculating future capital gains if the home is sold. If the property is received as a gift, the child generally takes the parent’s original cost basis, also known as a “carryover basis.”

In contrast, if the child purchases the home, either from the parent or a third party with gifted funds, their basis is their cost of acquisition. This distinction becomes important when the child eventually sells the property, as a lower basis from a gift can result in a larger taxable gain.

The capital gains exclusion on a primary residence is a significant tax benefit for the child. If the child owns and uses the home as their primary residence for at least two out of the five years preceding its sale, they can exclude up to $250,000 of capital gains from their income if single, or up to $500,000 if married filing jointly. This exclusion helps mitigate the tax burden on appreciation.

If the child obtains a mortgage, whether from a parent or a commercial lender, they may be eligible to deduct qualified mortgage interest paid on their tax return. This deduction is generally available for interest paid on up to $750,000 of mortgage debt for homes purchased after December 15, 2017. The mortgage interest deduction can significantly reduce the child’s taxable income, providing an ongoing tax benefit.

Similar to mortgage interest, the child may also be able to deduct property taxes paid on their home. This deduction, like the parent’s, is subject to the $10,000 state and local tax (SALT) limitation when itemizing deductions. If the child is the legal owner responsible for these payments, they can claim this deduction. While parents may face imputed interest income on below-market loans, the child typically does not have imputed income from such loans.

Financial and Legal Considerations

Assisting a child with a home purchase can have substantial effects on the parent’s financial planning. Providing significant financial aid, whether through gifts or loans, directly impacts the parent’s liquidity and retirement savings. Funds used for a child’s home reduce the capital available for the parent’s own future needs, potentially affecting their financial independence and security in retirement. Therefore, parents should carefully assess their long-term financial goals and ensure that such assistance does not compromise their own financial stability.

The child’s financial responsibility is also a critical consideration. Even with parental assistance, the child will face ongoing obligations, including property taxes, insurance premiums, utilities, and maintenance costs. If the parent co-signs a mortgage or acts as a lender, this can affect the child’s creditworthiness and their ability to secure future loans independently. Understanding and planning for these recurring expenses is important for the child to maintain homeownership sustainably.

When a loan is involved, robust loan documentation is necessary. A formal, written loan agreement, such as a promissory note, should clearly outline the terms, including the principal amount, interest rate, repayment schedule, and maturity date. For larger loans, securing the loan with a deed of trust or mortgage on the property can protect the parent’s interest and ensure the loan is legally recognized by the IRS, preventing it from being reclassified as an unexpected gift. Proper documentation avoids ambiguity and potential tax complications.

Deeding and title considerations are crucial for establishing clear ownership and future implications. The way the deed is structured determines legal ownership and rights, such as joint tenancy with rights of survivorship, or tenancy in common, which allows for individual shares to be passed through an estate. Choosing the appropriate title arrangement affects how the property can be sold, mortgaged, or inherited, and it should align with the long-term intentions of both parent and child. Consulting with a legal professional to draft or review these documents is highly recommended to ensure accuracy and compliance.

Integrating the home assistance into the parent’s overall estate plan is a final important step. The transfer of assets, whether as a gift or a loan, can impact the parent’s estate size and the inheritance received by other children or beneficiaries. Wills and trusts may need to be updated to reflect these arrangements and ensure equitable treatment among heirs. Addressing these considerations proactively helps prevent disputes and aligns the home purchase assistance with broader family wealth transfer goals.