Financial Planning Tips for Parents Supporting Children in Home Buying

Homeownership has become increasingly more difficult for young adults in the U.S. Once considered “the American dream,” buying a home in today’s market can feel out of reach to younger generations, especially in states like Colorado, where costs continue to soar. 

As of October 2024, the median sale price for homes in Colorado reached $640,100, a 3% increase from the previous year. Rising mortgage rates compound this challenge, making it harder for first-time buyers to save and qualify for homes. A recent National Association of Realtors survey found that the average down payment for first-time buyers is just 8%, compared to 19% for repeat buyers. 

For young adults in Colorado, even this smaller percentage can feel like an impossible goal. As prices (and interest rates) remain high, many Colorado parents are stepping in to financially support their children during the home-buying process. 

Family Financial Planning: Saving and Investing Strategies

Offering monetary assistance to help your children during the home-buying process is more than a kind gesture — it can also play a critical role in closing the economic gap in today’s aggressive housing market. However, it’s essential to approach this partnership with thoughtful and strategic family financial planning. 

Providing financial support for a home purchase should never compromise your own financial security. Start by evaluating your overall financial health, including retirement savings, emergency funds, and ongoing expenses. An advisor specializing in family financial planning and wealth management can help assess whether you’re in a position to offer meaningful assistance. Some strategies to consider include: 

Building a Dedicated Savings Plan

One effective approach is creating a separate savings or investment account specifically for this purpose. High-yield savings accounts or low-risk investment vehicles can help funds grow and remain available when your child is ready to buy. Earmarking this money in advance can help your child without derailing other financial priorities.

Leveraging Your Investments

Colorado parents with more advanced investment portfolios might consider tapping into appreciated assets like stocks or mutual funds to fund the assistance. Before liquidating investments, consult with a financial advisor to navigate potential tax implications and to ensure this aligns with your broader goals.

Aligning with Long-Term Plans

Helping your child buy a home isn’t just a financial decision — it’s also an emotional one. But don’t let emotions steer you away from your long-term objectives. Consider this assistance within the broader context of your family’s financial planning, including retirement, charitable giving, and estate planning.

Other Financial Assistance Options: Gifts, Loans, and Co-Signing

It’s important to remember that there’s no one-size-fits-all approach to helping a child purchase a home. Each option has unique advantages and considerations. Always consult with a professional financial planner to decide which options align with your needs and vision. 

Gifting Funds

Gifting money for a down payment can be a straightforward way to help with a down payment or even closing costs. According to IRS standards, you can gift up to $18,000 per person annually in 2024 without incurring gift tax implications. For married couples, this means potentially gifting $72,000 to a child and their spouse in a single year.

Intrafamily Loans

Offering a loan to your child can be a flexible option. Keeping the lending within the family allows you to offer more favorable terms than a bank while still earning some interest on your money. Be sure to charge at least the Applicable Federal Rate (AFR) to avoid future tax complications. Also, be specific about the repayment plan, so all parties know what to expect. 

Co-signing

Co-signing is another way to help your child qualify for a home loan if they have insufficient credit history or income. However, co-signing can bring significant risks. As a co-signer, you are equally responsible for the mortgage if your child cannot make payments. It’s critical to weigh this option carefully and establish clear boundaries.

Tax Implications: Navigating the Complexities of Helping Your Children Buy a Home

Understanding the tax consequences of your financial assistance is crucial for effective family financial planning. Tax laws are extensive and constantly changing, making it challenging for parents to understand the big-picture impact of helping children purchase a home. For example, gifting large sums may impact your lifetime estate and gift tax exemption, currently set at $13.61 million in 2024. Additionally, co-signing a mortgage could affect your ability to qualify for loans in the future.

Even if you’re familiar with the rules, tax professionals can help ensure you handle these transactions correctly and maximize your tax advantages. An experienced advisor can guide you in leveraging these exclusions effectively, documenting gifts appropriately, and aligning your gifting strategy with your overall financial planning and estate goals.

Establish a Balanced Approach to Supporting Your Children

Helping your child buy a home is a generous act — but it’s also a complex one. Striking a balance between supporting your child and protecting your financial well-being is crucial. By starting early, exploring various assistance options, and understanding the implications of your choices, you can provide meaningful support without jeopardizing your own financial future. Some suggestions to make the process as smooth as possible include: 

Define Clear Boundaries

No matter what type of support you’re offering, it’s critical to ensure everyone understands terms and expectations upfront. For loans, always create a written agreement detailing repayment schedules, interest rates, and contingencies. 

Maintain Financial Independence

Parents often feel pressure to help, but it’s important not to jeopardize your own financial stability. Create a plan that allows you to support your children without delaying your own goals. 

Encourage Your Child’s Responsibility

While providing assistance is valuable, it’s equally important to instill financial discipline in your child, especially when it comes to upholding the agreed upon terms of your support. 

Remember, the goal isn’t just to help your child buy a house; it’s to set them up for long-term financial success while maintaining your own. With thoughtful planning and open communication, you can turn the challenge of rising home prices into an opportunity to help strengthen your family’s financial foundation. 

Schedule a Free Consultation with Destiny Capital

Navigating the complexities of family financial planning and supporting your children’s home-buying journey requires guidance. At Destiny Capital, we understand the unique challenges and opportunities that come with intergenerational wealth transfer. Our team of experienced wealth management professionals can help you create a tailored strategy that aligns with your family’s goals and values. Schedule a free consultation today to learn more about developing a comprehensive financial planning strategy that works for you and your family.