We make $300,000. We want to buy a house for our daughter. What could go wrong?
‘big move‘ is a MarketWatch column that looks at all things real estate, from finding a new home to applying for a mortgage.
My 30-year-old daughter and her partner live in a very expensive housing market.
They are getting married soon and are funding their retirement accounts. My daughter’s city employee actually gets a 401(k) and a pension if she works for more than 5 years. They also have about $65,000 in liquid assets outside of their retirement accounts.
But their market makes buying a home in a decent neighborhood impossible.
My wife and I are in our early 60s, retired, and healthy. We have generous savings, two pensions, passive income of about $300,000 per year, and high-quality health insurance from our previous employer.
We have no debt other than a 30-year mortgage with a 2.75% interest rate. Considering our money market account (which is more than the mortgage balance) pays almost twice that, I’m reluctant to pay it off.
Any six-digit sum will result in us being subject to gift tax. Is there a legal way for us to acquire equity in our daughter’s hypothetical home (worth, say, $500,000) so that she can have a smaller mortgage and we can maintain equity in her home?
We have detailed estate plans and great attorneys. That would be about 95% of our wealth coming from her liquid share.
What we prefer ~ no Co-signing a mortgage However, if a financial issue arises for them, we use our discretion to decide whether or not to handle it.
Is this legal? Is this a stupid idea?
well-meaning parents
Do you have questions about buying or selling a home? Want to know where to go next? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear parents,
Decide how much risk you want to take because it’s not a simple decision.
You don’t want to co-sign the mortgage. This means you won’t be held liable if they don’t repay the loan, which is smart. But you still want to co-own the property with them through equity, which is a big undertaking. We’ll look at this in a moment.
If you give them $500,000, you’ll have less money for retirement. Even if you’re in a financial position with an annual income of $300,000, budget carefully to cover sudden and unexpected expenses.
“Look at some of the more extreme retirement scenarios to make sure you don’t need these assets to provide income. “What happens if you or one of your spouse dies prematurely after a long-term nursing home stay?” said Matt Sotir, financial expert at Equitable Advisors.
Assuming you have other children, consider whether your other children would consider such an arrangement fair and entitled to the same amount when purchasing the home.
Lastly, ask your daughter what her preferences are, and ask her partner’s opinion on whether it would be okay for her to get help from her in-laws. Is it okay to accept a “six-figure sum” in any form? Some partners may find it difficult and feel overly indebted to you.
Get a household loan
Putting aside the potential drama that could follow, here are two practical ideas to consider: This could be providing a loan to your daughter and her partner, or jointly owning a home with your spouse.
An intra-family loan can be used to purchase a home for your children or grandchildren, saving you money on estate taxes. Since it is a formal loan, make sure you stick to the repayment schedule and charge an interest rate to make it strictly a loan and not a gift.
For intra-family loans, follow the guidelines established by the Internal Revenue Service for applicable federal tax rates. This is the minimum interest rate that must be charged on intra-family loans to avoid income or gift tax.
Talk to your financial advisor about how to properly document this loan and set up an agreement with your daughter.
“Private mortgages can have more flexible terms than bank mortgages. This way, not only will your daughter be responsible for all housing costs, but she will also receive 100% of the future value of the house,” Sotir explained. “It helps us use excess capital, but at the same time we get a return on our investment.”
Make sure you have a plan in place if she stops paying her mortgage. Sotir describes a different scenario. What if they divorce and your daughter has to foot the bill? What happens if your home suffers serious damage from a natural disaster? Are you capable of handling such an emergency? And more importantly, are you willing to seize the property?
Partial ownership or joint ownership
The other options you pointed out are fractional ownership or joint ownership. This might include giving your daughter $500,000 to use to buy a house with a mortgage.
At this point, you essentially own the home jointly but technically do not have a mortgage. Your name will be on the deed ~ no On a mortgage. To solve this, “the mortgage company would have to agree to lend on a property where only one of the owners is taking out the mortgage,” Sotir said.
And write a contract that specifies who will pay taxes, repairs, and all other costs.
As a parent and a renter in an expensive real estate market, I understand the desire to help your child afford a home, especially since you are in a position to do so. You may feel like all the money you’ve accumulated throughout your life is meaningless if it’s not helping others, like your beloved daughter and future spouse.
Make sure you have enough money left over to prepare for a potential financial crisis. Be 100% sure you have saved enough money. That way, you may be able to afford to support yourself and her daughter even in the unlikely event that she loses her home.
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