Supporting Your Children's Homeownership Dreams: A Parent's Guide

Introduction: The Modern Housing Dilemma

So your adult child has been dropping hints about buying a home, and you're considering stepping in to help. First off, let me assure you—you're in good company. Parents helping their children purchase homes is increasingly common, especially given today's challenging real estate landscape. And it's not something new, families that could afford to have been helping their children with homeownership over the ages.

The current housing market presents a perfect storm of obstacles for first-time buyers. With home prices hovering near historic highs and interest rates that have doubled since 2021, the dream of homeownership feels increasingly out of reach for many young adults. In 2024, the typical down payment has skyrocketed to $63,000 in many markets—that's more than many people earn in an entire year! Add to that the burden of student loans that many millennials and Gen Z buyers are carrying, and it's no wonder they're looking to the Bank of Mom and Dad for support.

Recent data from Redfin reveals that nearly a quarter of younger homebuyers received family financial assistance in the form of gifts or inheritance to make their purchase happen. While social media might mockingly call these folks "nepo-homebuyers," the reality is far less dramatic. Helping your children secure housing isn't about playing favorites—it's a thoughtful financial strategy that can benefit multiple generations when done correctly.

But here's the catch: even the most generous intentions can backfire spectacularly without proper planning. Families navigating real estate transfers that are otherwise close-knit can become blindsided by unexpected tax bills, siblings harboring resentment over perceived favoritism, and valuable properties trapped in probate limbo for months or even years.

The good news? With some foresight and planning, you can avoid these pitfalls entirely. Let's explore the smartest ways to help your children achieve homeownership, along with the approaches that might seem clever on the surface but could cause significant headaches down the road.

The Housing Reality for Today's Young Adults

Before diving into specific strategies, it's worth understanding just how different today's housing market is compared to when most parents bought their first homes. The median home price in America has increased by over 50% in just the last five years, while wages have grown at a much slower pace.

For perspective, in 1980, the median home price was about 2.5 times the median household income. Today, that ratio is closer to 5.5 in many markets, and often much higher in coastal cities and popular spots like Scottsdale, Arizona. When many Baby Boomers and older Gen Xers bought their first homes, mortgage rates were higher, but home prices relative to income were significantly lower. Our first home cost $18,300 and the interest rate was 10.5%. Our mortgage payment was less than most rentals.

This context matters because it helps explain why parental assistance isn't simply "spoiling" adult children—it's often the difference between them building equity through homeownership versus paying increasingly high rents indefinitely.

3 Smart Ways to Help Your Child Get a Home

1. Gift Cash (Following IRS Guidelines)

The most straightforward approach to helping your child is simply giving them money for a down payment. Clean, flexible, and relatively uncomplicated—as long as you stay within tax guidelines.

For 2025, the IRS allows each person to give up to $19,000 per recipient annually without triggering gift tax reporting requirements. As a married couple, you and your spouse can each give this amount, meaning your child could receive up to $38,000 in a single year without anyone needing to file additional tax forms. If you want to give more, you certainly can—it just requires filing a gift tax return (Form 709), and the amount above the annual exclusion counts against your lifetime gift and estate tax exemption.

Speaking of that lifetime exemption, it currently stands at an impressive $13.99 million per person in 2024 (nearly $28 million for married couples). Unless your estate exceeds these amounts, you likely won't owe actual gift taxes, but the reporting requirements still apply.

If your child is using your gift for a mortgage down payment, they'll need a gift letter from you confirming that the money doesn't need to be repaid. Most lenders have standard forms for this purpose, and it's a routine part of the mortgage process. The lender wants to ensure that this "gift" isn't actually a loan that would affect your child's debt-to-income ratio.

Real-World Example:
The Johnsons wanted to help their daughter Emily purchase her first condo in Scottsdale. The property cost $350,000, and Emily had saved $15,000 toward the down payment but wanted more to bring her payments down a little. Her parents each gave her $19,000 (totaling $38,000), which, combined with her savings, allowed for a 15% down payment. The gift was properly documented with a gift letter for the mortgage company, and since the amount stayed within annual exclusion limits, no gift tax return was required.

2. Set Up a Family Loan (With Proper Documentation)

If you like the idea of helping your child while also encouraging financial responsibility, consider setting up a formal family loan. This approach allows you to provide financing at interest rates typically lower than what commercial banks offer, while still maintaining the structure of a legitimate loan.

Here's how to do it right:

First, establish an interest rate that meets the IRS's Applicable Federal Rate (AFR), which changes monthly and varies based on the loan term. These rates are typically much lower than mortgage rates from traditional lenders. If you charge less than the AFR, the IRS may consider the interest you should have collected as a taxable gift.

Next, create formal loan documentation. This should include:
- A proper promissory note
- Clear repayment terms
- Payment schedule
- Consequences for missed payments
- Provisions for loan modification if circumstances change

The beauty of a family loan is its flexibility. You can structure payments in ways that commercial lenders simply won't, such as interest-only periods during the early years, or graduated payments that increase as your child's income presumably grows.

Additionally, you can combine the loan strategy with the annual gift exclusion. For example, you might charge the required interest but then forgive up to $19,000 of the loan annually as a gift. This effectively reduces the loan balance while taking advantage of your annual gift tax exclusion.

Important Caution: If your child is using the family loan to purchase their primary residence and wants to deduct mortgage interest on their taxes, the loan must be properly secured by the property. This requires recording a deed of trust or mortgage with the appropriate county office—another reason to involve professionals in setting up the arrangement.

Real-World Example:
Michael and Susan created a $200,000 family loan for their son David to purchase a home. They charged the AFR of 3.5% on a 15-year term (when banks were charging 6.5%), documented everything with help from their attorney, and recorded the mortgage against the property. Each year, they forgive $15,000 of the principal as part of their annual gifting strategy. David makes regular payments, builds his credit history, and gets to deduct the mortgage interest on his taxes.

3. Establish a Trust (A Versatile Option for Many Situations)

Trusts aren't just for the ultra-wealthy or families featured in succession dramas. They're increasingly practical tools for average families, especially when real estate is involved. A trust can provide significant flexibility, protection, and tax advantages when helping your child with property.

There are two main categories to consider:

Revocable Living Trusts: These trusts can be modified or terminated during your lifetime. They're excellent for:
- Avoiding probate after your death
- Maintaining control over the property while you're alive
- Providing seamless property management if you become incapacitated
- Creating specific conditions for how and when your children receive property

Irrevocable Trusts: While less flexible (as the name suggests, they generally can't be changed after creation), these trusts offer advantages like:
- Potential estate tax benefits
- Asset protection from creditors
- Protection from divorce settlements
- Preserving means-tested government benefits if your child might need them

For parents with substantial real estate holdings or multiple children, trusts offer sophisticated options for fair distribution. For instance, a Qualified Personal Residence Trust (QPRT) allows you to transfer your home to your children at a reduced gift tax value while continuing to live there for a specified term.

Another popular option is creating an LLC or Family Limited Partnership to hold rental properties, then gradually transferring interests to your children. This approach can provide both income and valuable tax advantages.

Real-World Example:
The Garcias owned a vacation home in Florida and a rental property in Texas. They created a revocable trust that specified how their three children would share these properties after their deaths. The trust included provisions for a maintenance fund and a mechanism for one child to buy out the others if desired. This arrangement avoided probate in multiple states and prevented potential disagreements among siblings about how to manage the properties.

3 Common Mistakes That Can Create Major Problems

1. Adding Your Child to the Deed Without Understanding the Consequences

It seems like such a simple solution—just add your child's name to your property deed and you've given them partial ownership, right? Unfortunately, this seemingly straightforward approach creates several significant problems.

First, adding someone to your deed constitutes a gift of property. If your home is worth $500,000 and you add your child as a 50% owner, you've effectively given them $250,000. This likely exceeds your annual gift exclusion and requires filing a gift tax return.

Second, when you add someone to a deed, they receive your original cost basis for tax purposes. Let's say you purchased your home decades ago for $100,000, and it's now worth $500,000. If you sell, you might qualify for the $250,000 per person ($500,000 for couples) capital gains exclusion on a primary residence. But if your child inherits your basis and later sells the property that isn't their primary residence, they could face significant capital gains taxes.

Third, you've surrendered control. Your child now has equal say in decisions about the property. If they face financial difficulties, their creditors could potentially place liens on the property. If they go through a divorce, their ownership interest might be considered in the settlement.

Real-World Cautionary Tale:
Barbara added her son Thomas to the deed of her home, thinking it would simplify things after her eventual passing. Two years later, Thomas experienced serious financial problems with his business. His creditors placed a lien against his assets—including his interest in Barbara's home. Barbara couldn't refinance or sell without dealing with these complications, creating significant stress and legal expenses.

2. Relying Solely on a Will for Property Transfer

Many people assume that having a will is sufficient for passing down real estate. While a will certainly beats having no estate planning documents at all, it has significant limitations when it comes to real property.

The biggest drawback? A will must go through probate—the court-supervised process of validating the will and distributing assets. Probate has several disadvantages:

- It's public: Court records are accessible to anyone, meaning your family's financial details become public knowledge.
- It's slow: Even uncomplicated probate cases typically take 6-12 months; complex ones can take years.
- It's expensive: Between court costs, attorney fees, and executor fees, probate can consume 3-7% of your estate's value.
- It may involve multiple states: If you own property in different states, your executor may need to navigate probate in each location (called "ancillary probate").

Beyond these practical concerns, a will offers limited control over how your property is used after transfer. Once assets are distributed through probate, your beneficiaries can generally use them however they wish, regardless of what you might have preferred.

Real-World Cautionary Tale:
After George passed away, his three children discovered his vacation home in Maine would need to go through probate in both his home state of Pennsylvania and in Maine. The process took 18 months and cost nearly $30,000 in legal fees—money that could have remained in the family had George used a trust instead of relying solely on his will.

3. The "$1 Sale" Myth

The idea sounds clever at first glance: sell your property to your child for a nominal amount like $1, avoiding gift taxes while transferring ownership. Unfortunately, the IRS wasn't born yesterday.

The tax authority recognizes that selling a $500,000 property for $1 isn't a legitimate sale—it's a gift with a thin disguise. You'll still need to file a gift tax return for the difference between the property's fair market value and the token amount paid.

Even worse, this approach creates a tax nightmare for your child. When someone purchases property, they take on the seller's cost basis adjusted for the purchase price. In a $1 sale of a property you bought for $100,000, your child's basis would essentially be $100,000. When they eventually sell the property for its market value (let's say $600,000 at that future date), they could face capital gains tax on a $500,000 gain.

By contrast, if they had inherited the property after your death, they would receive a "stepped-up" basis to the property's fair market value as of your date of death—potentially saving them hundreds of thousands in capital gains taxes.

Real-World Cautionary Tale:
Frank "sold" his rental property to his daughter Melissa for $1, thinking he was being clever. When Melissa sold the property years later for $400,000, she faced a capital gains tax bill on nearly the entire amount, as her basis was the same as her father's original purchase price from 30 years earlier. Had she instead inherited the property after his death, her basis would have been stepped up to the market value at that time, potentially saving her over $70,000 in taxes.

Additional Considerations When Helping with Real Estate

Impact on Other Children

If you have multiple children but are only helping one with real estate, consider how this affects your overall estate plan. You might balance things by making provisions for your other children through life insurance, investment accounts, or other assets. Communication is key—explaining your reasoning can prevent resentment and misunderstandings later.

Your Own Financial Security

Before helping your children with real estate, ensure your own financial house is in order. Your retirement security should remain the priority. As the airplane safety demonstrations remind us: secure your own oxygen mask before helping others. The greatest gift you can give your children is not becoming financially dependent on them later in life.

Tax Law Changes

Estate and gift tax laws change frequently with different political administrations. The current lifetime exemption amounts are historically high but are scheduled to sunset in 2026 unless Congress acts. Working with knowledgeable advisors who stay current on tax law changes is essential for long-term planning.

Finding the Right Solution for Your Family

Every family's situation is unique. The best approach depends on:
- Your financial circumstances
- Your child's financial responsibility
- Your estate planning goals
- Family dynamics
- The types of properties involved
- Your tax situation

Consider consulting with:
- An estate planning attorney
- A CPA with experience in real estate taxation
- A financial advisor who can look at the big picture

The modest cost of professional guidance can save your family tens or even hundreds of thousands of dollars in the long run.

Conclusion: Creating a Legacy, Not a Burden

Helping your children achieve homeownership in today's challenging market isn't about coddling them—it's about making a strategic financial decision that can benefit multiple generations. When done thoughtfully, your assistance becomes more than just a gift; it becomes the foundation of their financial future and a meaningful part of your legacy.

The key is approaching this significant transfer with careful planning rather than rushed decisions. The right strategy should protect both your financial interests and your child's, minimize unnecessary taxes, and preserve family harmony.