Funding Adult Children's First Homes: A Strategic Guide for Parents

Keith Wetjen |
Categories
Wealth Planning
Multigenerational Planning
Family

The math on first-time homeownership has gotten brutal. In many markets, starter homes run $600,000+, mortgage rates hover around 6.5%, and lenders want 10-20% down. That means your kid needs $60,000-$120,000 in cash just to get in the door - and that's before accounting for closing costs, moving expenses, and the emergency fund every new homeowner should have.

As a parent watching this unfold, you naturally want to help. But how you help matters more than you might think. Different strategies carry different tax implications, create different family dynamics, and offer different levels of protection if things go sideways.

Let's walk through your options - from the simplest to the most sophisticated - so you can make an informed decision that works for your family.

The Context: Why This Matters Now

First-time buyers face headwinds previous generations didn't:

  • Home prices have outpaced wage growth significantly
  • Student loan debt often delays home savings
  • Stricter lending standards post-2008 make qualifying harder
  • Competition from institutional investors and cash buyers

Meanwhile, you're in a different position than your parents were. With the permanent $15 million estate tax exemption starting in 2026, many families who were worried about estate taxes now have breathing room. That changes the calculus around gifting strategies.

Option 1: The Outright Gift

How it works: You write a check. Your child buys a house. Simple.

Tax implications: In 2025, you can gift $19,000 per person per year with no gift tax consequences. If you're married, that's $38,000 to your child. If your child is married, you can gift $38,000 to them and another $38,000 to their spouse - that's $76,000 in one year without any reporting requirement or using up your lifetime exemption.

Beyond the annual exclusion: Need to gift more? You'll file Form 709 to report it, and it reduces your lifetime gift tax exemption (currently $13.99 million in 2025, rising to $15 million in 2026). For most families, this isn't a problem - you're still well below the threshold.

Example: You give your daughter $100,000 for a down payment. That's $81,000 over the $19,000 annual exclusion. You file Form 709, and your lifetime exemption reduces from $15 million to $14,919,000. No tax due, just paperwork.

The upside:

  • Clean and simple
  • Your child owns the home outright
  • No ongoing complications

The downside:

  • No divorce protection (in most states, gifts to your child become marital property)
  • No control over how the money is used
  • Reduces your lifetime gift exemption if you exceed annual limits

Option 2: Annual Exclusion Gifting Strategy

How it works: Instead of one large gift, you spread it over multiple years, staying within the annual exclusion.

The numbers:

  • Single parent to single child: $19,000/year
  • Married parents to single child: $38,000/year
  • Married parents to married child: $76,000/year (giving to both spouses)

Timeline strategy: Start gifting now even if your child isn't ready to buy yet. The money can accumulate in their savings account. With $76,000/year capacity, married parents can help their married child accumulate $228,000 over three years without ever filing a gift tax return.

December/January planning: Smart timing: Make your 2025 gift in December, then turn around and make your 2026 gift in January. That's $152,000 in two months with no gift tax reporting.

The catch: This only works if you have time. If your child needs a down payment now, this strategy alone won't work.

Option 3: The Intra-Family Loan

How it works: You loan your child money for the down payment, charging the IRS-required minimum interest rate (the Applicable Federal Rate, or AFR).

Current AFR rates: For loans over 3 years, the AFR is typically 4.5-5% (varying by month and term length). That's better than the 6.5-7% they'd pay on a conventional mortgage, but you're still charging interest to avoid gift tax issues.

Why charge interest? If you make an interest-free (or below-AFR) loan, the IRS treats the forgiven interest as a gift. For large loans, that can exceed the annual exclusion quickly.

How to do it right:

  1. Execute a formal promissory note
  2. Charge at least the AFR
  3. Establish a repayment schedule
  4. Actually receive the payments
  5. Report the interest income on your taxes

Your child's benefit: The mortgage interest deduction still applies (subject to the $750,000 mortgage cap for interest deductibility), so your child gets some tax benefit while paying you less than they'd pay a bank.

The risk: If you're not paid back and can't prove it was a legitimate loan (proper documentation, regular payments), the IRS might re-characterize it as a gift.

Option 4: Co-Signing the Mortgage

How it works: You guarantee your child's mortgage, allowing them to qualify for a larger loan or better rate.

Why lenders like it: Your income and credit history strengthen the application. This can be the difference between getting approved and getting rejected, especially for young borrowers with limited credit history.

The hidden costs:

  • Your credit is on the line: The mortgage appears on your credit report as your debt
  • Full liability: If your child doesn't pay, you're 100% responsible
  • Impacts your borrowing capacity: That $400,000 mortgage reduces how much you can borrow for other purposes
  • Relationship damage: Mixing money and family guarantees is risky; if things go wrong, relationships often suffer

When it makes sense: This is really a last resort - when your child can afford the payments but doesn't quite qualify on paper (perhaps due to student loans or limited work history). Even then, proceed with caution.

Better alternative: If you were planning to co-sign because your child can't afford the payments alone, they probably shouldn't be buying that house. Consider helping them find something more affordable instead.

Option 5: Down Payment Gift with Lender Requirements

How it works: You give money specifically for the down payment, but you need to follow lender rules to make the process smooth.

Lender gift letter requirements: Most lenders require:

  • A signed gift letter stating the money is a gift, not a loan
  • No expectation of repayment
  • The relationship between giver and recipient
  • Your contact information and source of funds

Timing matters: The gift money typically needs to be in your child's account for at least 60 days before application, or it triggers extra documentation requirements (lenders want to ensure it's not a secret loan).

Strategy: If your child is seriously house hunting, gift the down payment money before they start the formal application process. Let it sit in their account for 60+ days. This creates the cleanest paper trail.

Tax impact: Same as Option 1 - you're making an outright gift with the same annual exclusion limits and reporting requirements.

Option 6: Advanced Strategies for Larger Gifts

If you're dealing with significant wealth and want more sophisticated planning:

Life Estate Strategy

You gift your child a property but retain a life estate (the right to live there or rent it out). At your death, they receive full ownership without it going through probate. Complex, but useful in specific situations.

Qualified Personal Residence Trust (QPRT)

You transfer your home to a trust for a set term while continuing to live there. At the end of the term, ownership passes to your child at a reduced gift tax value. This is estate planning territory—talk to an attorney.

Family Limited Liability Company (Family LLC)

You create an LLC to hold real estate, then gift LLC interests to your child over time with valuation discounts. This is sophisticated estate planning for significant wealth. Not for the average home purchase.

The Divorce Protection Issue

Here's a reality check: depending on how you structure help, your financial gift could end up benefiting your child's ex-spouse if they divorce.

How to protect the gift:

  1. Gift to your child only, not jointly to the couple Even if your child is married, direct the gift specifically to your child alone. In some states, this helps establish it as separate property, not marital.
  2. Written acknowledgment Have your child's spouse sign an acknowledgment that the gift is to your child alone and will remain separate property. Not foolproof, but helpful.
  3. Prenuptial agreement If your child isn't married yet, suggest a prenup that clearly defines how parental gifts are treated. Yes, it's an awkward conversation. It's also smart.
  4. Trust ownership Instead of gifting directly, put the money in a trust for your child's benefit. The trust can buy the house or provide the down payment. This offers the strongest divorce protection but requires legal fees to establish.

Note - State law matters: Community property states (California, Texas, Arizona, and others) have different rules than equitable distribution states. Talk to a local attorney about how your state treats gifts.

Setting Expectations: The Family Dynamics Piece

This isn't just financial planning - it's family dynamics. Having clarity upfront prevents resentment later.

Questions to address:

Equal treatment of siblings: If you have multiple children, will you give each the same amount? What if one child needs more help? What if another child never buys a home? These conversations are easier to have before you write the first check.

One-time event or ongoing support? Make it clear whether this is a one-time gift or the beginning of regular assistance. You don't want your child expecting you to bail them out of every financial challenge.

Require their contribution: Consider making the gift contingent on your child contributing their own savings. This ensures they have skin in the game and encourages responsible homeownership. A 50/50 match can work well.

No bailout cycle: Be explicit that this help is for the down payment, not for ongoing mortgage payments. If they can't afford the monthly payments on their own, they need a less expensive house.

The Bottom Line

The best strategy depends on:

  • How much you're giving: Small amounts? Stick with annual exclusion gifts. Large amounts? Consider loans or trust structures.
  • Your estate planning: If you're worried about estate taxes (increasingly rare with the $15 million exemption), gifting now has benefits.
  • Your child's marriage status: More divorce protection is needed if they're married or likely to marry soon.
  • Your relationship with your child: Do you trust them to use the money responsibly? How would you feel if the marriage fails and the house is sold, with the proceeds split?
  • Family dynamics: How will this affect relationships with other children?

Start with these questions:

  1. Can I afford this gift without jeopardizing my own retirement?
  2. Does my child really need this much house, or would something more modest work?
  3. Am I enabling good financial habits or creating dependency?
  4. Have I talked to my wealth advisor, attorney and accountant about the optimal structure?

Helping your children is wonderful. Doing it strategically is even better.

Funding a home purchase is often just one part of broader wealth transfer planning. Take the time to structure the help in a way that protects everyone involved - including the relationships that matter most. If you'd like to discuss how this fits with your overall estate plan, retirement goals, and family dynamics, reach out to your Entrust Wealth Partners advisor or call us at (860) 838-3730.

The information provided is for educational purposes only and should not be considered tax, legal, or financial advice. Please consult with your tax advisor, attorney, and financial planner to determine the best strategy for your family's situation. State laws vary significantly regarding property rights and divorce, so local counsel is essential.