Money in the Middle

Sandwich Generation Talking About Money Up, Down and Across Generations

Is Helping Your Kids with Housing Costs the Right Financial Decision for You?

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Helping with Housing Costs- Right Decision for You?

Helping with Housing Costs- Right Decision for You?

If you are a baby boomer and thinking about helping pay for housing for your adult children or for your parents, there are some basics rules to remember.  But, there are also some things that are very different about helping a member of the younger or older generation.  In both cases, balancing the emotional decision with financial reality is important for your financial future.

 

Let’s look at the younger generation first: 

Before this last housing bubble, when you needed a down payment to buy a house, many adult children turned to Mom and Dad to help fund the down payment.  Those times are back as lenders look for a down payment of 10-20%.  With housing prices and tax incentives for first-time home buyers it might be a great time to help out…if you can afford it. 

 

1. Know the mortgage rules.   Only 6% of down payment can be donated as a gift is limited if it’s an FHA conventional loan.  If you provide the funds to the homebuyers ahead of time, do you have agreement on what the money will be used for? will it be returned if they don’t find a house within a certain period of time?

 

2.  Know the tax rules on gifting.  If the funds are being provided as a gift, know the maximum amount you can gift per person per year ($12,000) without tax implications for them.  Once the money is gifted, it is theirs to do with as they please. 

 

3.  Use a written agreement if it is a loan. Best intentions today, but things can change.  To avoid hard feelings in the future, put together an agreement that spells out the conditions of the loan (even if you are hoping to forgive the loan at a later date). This also makes clear to your adult child that this is a financial transaction that they are responsible for, just as they would be to a bank.

 

4.  Can you really afford to help?  This is a tough question, but you need to ask yourself honestly whether your financial circumstances make it possible for you to help. And, whether your child can really afford the purchase or whether you are enabling them to do something which is too much of a stretch.  If you are thinking of taking money out of a retirement fund to help, you probably can’ afford it. You’ll need that money for your own retirement, and taking out funds at the current market price is probably not a wise financial decision.  What if the money doesn’t get paid back?  What if you lose your job or have a medical condition and need those funds? Can you afford to do this for all of your children?

 

If you have a financial planner, ask him/her what they think and if you decide to help, where should the funds come from?

 

Resources:

Bank of Mom and Dad  -Washington Post article 

IRS rules on gifting  

IRS Rules on first time home buyers tax credits

 

 

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Written by Laura Rossman

April 6, 2009 at 10:21 am

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