Can My Parents Buy Me a House and I Pay Them Back?

Parents often assist adult children with homeownership, providing financial support with the understanding of repayment. These arrangements, while beneficial, involve financial, tax, and legal considerations requiring careful planning. Formalizing any agreement clarifies expectations and ensures regulatory compliance.

Structuring it as a Formal Loan

To maintain clarity and adhere to tax regulations, parents providing funds for a home purchase with repayment expectations should structure it as a formal loan. For the IRS to recognize it as a bona fide loan, not a disguised gift, specific terms must be established: principal amount, interest rate, repayment schedule, and maturity date.

A formal family loan requires an interest rate. The IRS publishes monthly Applicable Federal Rates (AFRs), minimum rates for intra-family loans to avoid tax issues. Rates vary by loan term: short-term (up to three years), mid-term (three to nine years), and long-term (over nine years). Charging below the AFR could result in the IRS reclassifying forgone interest as an imputed gift, with gift tax implications for parents.

To protect parents’ interest and allow the child to deduct mortgage interest, the loan can be secured by the property via a mortgage or deed of trust. If secured and meeting IRS qualified residence interest requirements, the child may deduct interest paid. This requires proper documentation and recording.

Parents, as lenders, must report interest income received from the child on their federal income tax return; this is taxable. If the child defaults and the debt is forgiven, the amount could be reclassified as a gift, potentially triggering gift tax if it exceeds annual exclusion limits.

Structuring it as a Gift

Parents can also gift funds for a home purchase, eliminating repayment expectations. The IRS allows individuals to gift a certain amount annually without incurring gift tax or using their lifetime exemption. For 2025, the annual gift tax exclusion is $19,000 per recipient. Married parents can jointly gift up to $38,000 to their child in a single year without gift tax implications or reporting requirements.

Gifts exceeding the annual exclusion are not immediately taxable but count against the donor’s lifetime gift tax exemption. For 2025, this exemption is $13.99 million per individual. While large gifts may reduce the amount passed tax-free at death, most individuals will not owe gift tax due to this high exemption.

A true gift has no expectation of repayment. If funds are intended as a gift, there should be no formal or informal agreement for the child to pay parents back. Any subsequent “repayment” could complicate the original gift’s tax treatment or be construed as a separate gift from the child to the parents.

The child, as gift recipient, does not pay income tax on the gifted funds. However, the child’s tax basis in the gifted property is typically the parent’s adjusted basis, which affects future capital gains if the house is sold. Significant appreciation could lead to a larger capital gains tax liability for the child upon sale than if they had purchased the home with a higher initial basis.

Essential Documentation and Tax Reporting

Proper documentation and accurate tax reporting are crucial for both loan and gift scenarios to avoid IRS complications. For a formal loan, a promissory note outlines terms like principal, interest rate, repayment schedule, and default clauses. This note legally binds the child to repay and should be signed by both parties.

If the loan is secured by the property, a mortgage or deed of trust must be prepared and recorded with the local county recorder’s office. This grants parents a lien, protecting their interest in case of default. Recording requirements vary by jurisdiction but commonly include notarization, a clear legal description, and recording fees. An amortization schedule, detailing payment allocation between principal and interest, provides a clear record. Parents must report received interest as income on their federal tax return, typically on Schedule B (Form 1040) if interest exceeds $1,500 or is from a seller-financed mortgage.

For a gift, especially when the child seeks a traditional mortgage, lenders often require a gift letter. This formal statement from parents confirms the funds are a true gift, with no repayment expectation, specifying the amount and donor’s relationship.

If the gifted amount exceeds the annual gift tax exclusion ($19,000 per recipient for 2025), parents generally file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This form reports the gift to the IRS and tracks the use of the parents’ lifetime gift tax exemption. Form 709 requires information about the donor and donee, a description and valuation of the gift, and details regarding any annual exclusion claimed or lifetime exemption used. It is filed annually, typically by April 15 of the year following the gift.

Seeking professional legal and tax advice is highly recommended to ensure documentation is correctly prepared and reporting obligations are met.

Alternative Family Ownership Arrangements

Beyond direct loans or gifts, other arrangements exist for parents to assist children with homeownership, each with distinct financial and tax implications. One option is co-ownership, where parents and their child jointly purchase and hold title. This can be structured as tenants in common (unequal shares, no automatic right of survivorship) or joint tenants (equal shares, rights of survivorship).

In co-ownership, responsibilities for mortgage payments, property taxes, insurance, and maintenance are typically shared based on ownership percentages or a separate agreement. Each co-owner can generally deduct their share of qualified mortgage interest and property taxes. Upon sale, each co-owner may exclude up to $250,000 of capital gains if they meet primary residence ownership and use tests.

Another arrangement involves parents purchasing the house outright and renting it to their child. Parents must charge fair market rent to avoid classification as a gift or personal use property by the IRS. Charging below fair market rent can limit or disallow rental expense deductions. Fair market rent is what an unrelated person would pay for a similar property. While the IRS may allow a modest “good-tenant discount” of around 10% below market rent, charging substantially less can result in adverse tax consequences.

As landlords, parents must report rental income received from their child. They can deduct various property expenses, including mortgage interest, property taxes, insurance premiums, maintenance, and depreciation. If rented at fair market value and treated as a rental activity, these deductions can offset rental income. This arrangement establishes a formal landlord-tenant relationship, defined by a lease agreement. Future sale or transfer to the child would involve separate transactions, potentially with capital gains tax implications for parents.