More parents want to help children buy homes in today’s tight market

Parents have long helped children buy homes. But these days—with interest rates higher, a record number of young buyers seeking to nest and many areas experiencing a housing shortage—acquiring residential real estate has become more of a family affair than ever before.

The question is: If you want to help your children (or grandchildren) buy a home, what are your options for providing such financial assistance? 

To help you decide, we describe some of the key issues you might want to explore, as well as the four main tools parents commonly used to help children into new homes: outright gifts, loans, leases and gifts to irrevocable trusts.

Pressure is on: Demographics and real estate trends 

It’s unsurprising that more clients have been asking us recently how best to help their children buy first homes. Housing prices, mortgage rates and competition for homes are all still high, even though the Covid-19 pandemic is now years in the past.

During the pandemic, many local housing markets saw dramatic price surges. For the nation as a whole, home prices rose a startling 39% from June 2020 to August 2022.¹

While prices may have come down a bit since depending on the metro area, they have not dropped in most areas of the country—nor do we expect them to. That’s because:

Demand remains strong. Millennials (aged 25 to 43) now form the largest generation group in the United States (about 73 million strong), and make up the largest percentage of new home buyers ( 38%, according to the National Association of Realtors). They are projected to be the dominant force in the home market for years to come.²

Supply remains limited. Since the 2008 bursting of the housing bubble, new home development in the United States has lagged demand, especially in the single-family market. We estimate that today this gap totals approximately 2 million–2.5 million too few housing units.³

Moreover, the 2022-2023 spike in mortgage rates exacerbated this shortage by creating a “lock in” effect for existing home owners. Even with the modest drop in rates over the last year, homeowners who refinanced when rates dipped are still disincentivized to move and take a new mortgage at a higher rate (2020 had the largest number of refinances on record; 2021 had the third highest, trailing only 2003).⁴ About 60% of U.S. homeowners currently have a mortgage rate locked below 4%, according to a recent report using Federal Housing Finance Agency data.⁵

How much can you (and/or do you want to) help?

Before you decide what tools you might use to help your children buy a home, we recommend that you carefully evaluate the potential impact such assistance might have on your personal wealth goals.

For instance, are you wanting to help with just the down payment? The purchase price? Who is going to be responsible for carrying costs and future improvements? If you have a number of children, do you have capacity and desire to do the same for each of them?

Your answers to these questions can be included in your personal wealth plan to ensure it doesn’t put any other goals in jeopardy.

We also recommend that you think through all potential family issues that could arise with your offering of help. For example: What kind of family policy might you want to adopt about gifting, and how would you communicate that policy to them? (Among the many options: Some say, “This is your inheritance early,” while some others might set a certain dollar amount as a gift that will be extended to all the children no matter what they use the funds for.)

Whatever you decide might be the best policies for your family, there remains the issue of how, exactly, you would provide the assistance to your child. 

1. Gifts: Just give your child the money

Probably the simplest option could be to give the cash that a child can use as a down payment on a home, or to buy one debt-free. Such a gift would almost surely require that you file a U.S. gift tax return. However, you wouldn’t have to actually pay U.S. gift taxes unless making the gift pushed the total amount of taxable gifts you have made during your lifetime to over your lifetime gift tax exclusion (which is, in 2024, $13.61 million per person).⁶

If you give only enough for a down payment, your child would presumably apply for a mortgage for the balance of the purchase price. If your child’s income and/or assets would not alone be sufficient to qualify for a mortgage, you could act as a co-borrower or (under certain circumstances) as guarantor.⁷

This gifting strategy assumes your child will take title to the home, either solely in her individual name or jointly with her spouse. This means the home might be subject to potential creditors—which includes her spouse if there’s a divorce. (You might save her from losing her home to an ex-spouse by putting your gift into a well-drafted and well-managed trust for her benefit rather than giving her the money outright.) 

2. Loans: Act as your child’s bank

You might, instead, lend your child money (up to the full purchase price) and have him take title in his name. (Again, to protect against the claims of potential creditors the loan could be made to a trust for the child’s benefit, which would take title.) 

Your loan needs to be evidenced by a note. So that no part of this loan is treated as a gift by the Internal Revenue Service, this “intra-family” loan must carry a minimum interest rate (the Applicable Federal Rate, or “AFR”), which is almost always lower than commercial mortgage rates. 

The interest you receive from this loan would be taxable income to you. If the loan is secured by a mortgage, your child could treat interest on the first $750,000 of the debt as deductible mortgage interest.

Parents can decide to forgive rather than collect interest; they can, and often do, even forgive the principal. Usually, parents tend to forgive up to the annual gift tax exclusion amount ( $18,000 from each parent/per donee in 2024, or $36,000 per couple). In that case, interest forgiven is still income to the parents, with tax on that amount payable at ordinary rates.⁸

It’s common for parents to use their own cash for the gift or intra-family loan that enables a child to purchase home. But there is another option that can provide parents with more flexibility: Some firms will allow you to pledge assets (usually marketable securities) as part of the loan collateral for your child’s home purchase.

Such a pledge is often used in lieu of a down payment, and offers the benefit of allowing these assets to stay invested and continue growing over time, as well as potentially avoiding any gifting implications.

3. Leases: Become your child’s landlord

If you own the home in which your child lives, you can avoid gift tax consequences by leasing the space to your child at a rent that reflects its fair market value, which can be determined by a realtor. This rental income would be subject to income tax; however, if the home is business property in your hands, ordinary and necessary carrying costs (such as taxes, maintenance, etc.) may be deductible.⁹

Because you retain ownership, the house will be included in your (or your spouse’s) estate. You’ll therefore want to factor the property into your overall estate plans.

4. Trusts: Complicated but interesting choices

Using an irrevocable trust can be an elegant way to provide this financial assistance, but it’s neither easily nor inexpensively deployed. However, you may already have in place an irrevocable trust for the benefit of your child, which might possibly be used to facilitate the purchase of a home.

If you choose to go down this path, there are options:

The irrevocable trust could buy the property.

The trust could buy the home for cash, perhaps after selling some assets or borrowing against its assets.

Or the trust could use its own cash to make a down payment, with the balance of the purchase price financed by a commercial mortgage. In this case, the trust would be the borrower, almost always supported by a personal guarantee from an individual. 

Either way, the irrevocable trust then owns the home and would pay all “owner”-type expenses (such as property taxes, homeowners’ insurance and probably the common charges). That means the trust would need to have sufficient liquidity to pay those ongoing expenses.

Your child (because he or she is a beneficiary of the trust) would have the right to live there rent-free. But your child’s spouse would have no current or future ownership interest in the property. 

The irrevocable trust makes a distribution so that your child and his/her spouse can buy and own the home jointly. 

State law will then govern how this “marital property” will be treated. Generally, a trust distribution to a married beneficiary is the beneficiary’s separate property. However, if the beneficiary uses the amount distributed to buy a home that is titled jointly in the name of both spouses, the beneficiary has effectively made a gift to the spouse.

Sourcing your capital…

Every individual and family are unique. That said, many Next Gen buyers might find an adjustable-rate mortgage (ARM) makes more sense than a fixed-rate mortgage because:

1. Rates have already started to come down off their highs, and we think they are likely to come down farther over the next few years, so they could pay the lower ARM now (as compared to a fixed-rate mortgage) and refinance later at a lower rate later, potentially into a fixed product
2. Most buyers in their 20s and 30s are not purchasing their “forever” homes; they’re likely to sell in the next five to 10 years. (In this age group, our historic average for a mortgage is seven years.)

In addition, the children of parents who have an established relationship with the right financial firm might be able to:

• Obtain more favorable terms on mortgages 
• Enjoy flexible underwriting (which can be important for those who lack an income history and rely on trust distributions)
• Protect their privacy—by using entities (e.g., trusts and limited liability companies) to structure a mortgage

How we can help

Your J.P. Morgan team is available to help you and your children work through all your options and find the approach that suits your family.