Buying a house for your child: Benefits and tax implications

If you’re in a financial position to do so, you might have considered buying a house for a child to live in – particularly as house prices continue to rise.

However, you might also have worried that taking this important life step for them could stifle their development, hurt your relationship with them or harm your net worth. But with forethought, communication and planning, it doesn’t have to be that way.

Benefits of buying a house for your child to live in

Buying a home for your child can accomplish a few goals. If handled properly, it can help them develop a greater sense of responsibility, and it can be a portfolio diversifier for you. Here are three reasons you might consider buying a house for a child.

It can build your child’s sense of self-sufficiency.

For many affluent families, the cost of a house usually isn’t an issue. However, conflict can arise in how this type of purchase meshes with your values. Will buying a home for your child help develop character or instill dependency?

When handled correctly, and depending on the child, it can be a positive move. Look at it as a chance to invest in your child’s development and teach them about managing a household and being accountable.

One approach is to consider your child a tenant, requiring them to pay rent or utilities. Handling the initial and ongoing transaction objectively can create a sense of responsibility and bring benefits for both you and your child.

It’s important to agree upfront on ground rules to avoid future conflict. For example, consider drawing up a lease for your child to make sure all responsibilities and home agreements are legally recorded and upheld, and consider the consequences if they aren’t. Taking a security deposit from your child may help you make sure they maintain the terms of any lease or agreement.

It can provide stability for your child.

Home ownership is still considered to be a cornerstone of the American dream and is a proven strategy for building long-term wealth. It offers a level of both financial and lifestyle stability, fostering a sense of belonging and community that usually doesn’t come with renting, and can lead to a sense of pride and accomplishment.

Homeowners are often more likely to put down roots in the community, which may contribute to their overall satisfaction and well-being. Home ownership can also provide a financial legacy that can be passed down to your children’s children.

It can provide your child with an investment opportunity.

A home can be a lucrative investment due to the potential long-term price appreciation. By making mortgage payments every month – even if it’s in the form of rent – your child is building equity that becomes a valuable financial asset over time.

If your child decides to move later, they could keep the property and earn extra income by renting it out. Not only will they receive a stream of (taxable) income; they may also be able to deduct expenses like repairs, mortgage interest, utilities and depreciation

Note that if your child sells a renter-occupied property, they may be less likely to qualify for a capital-gains tax exemption.

Overall, if you’re considering buying a house for your child as an investment, it’s important to think about the big picture, both financially and personally. Your investment should work financially within the constraints of your portfolio, but it also needs to be in the best interest of your child and your relationship with them.

Tax implications of buying a house for your child to live in

Along with the benefits above, buying a house for a child can come with tax benefits if planned out properly. Here are four tax implications to consider.

Take advantage of the gift tax.

If you give a home to your child as an outright gift, such as an advance on their inheritance, you can take advantage of the current federal tax exclusion on gifts and estates.

Each parent may give a gift to a child of up to $13.99 million in 2025 under the gift tax lifetime exemption before the funds are subject to federal taxation. Note that if the Tax Cuts and Jobs Act expires in 2025, this limit will revert to its former amount, indexed for inflation.

As tax rules are subject to change, you should consult with your tax advisor before making a gift and consider any state estate taxes that may apply.

Use a trust to save on estate taxes.

You could potentially minimize estate taxes by placing the house in an irrevocable trust with your child named as the beneficiary.

Aside from this, a trust could be a tool that enables a child to purchase a home if they do not otherwise qualify for a conventional mortgage. This could be done in several ways:

• A child could receive an outright distribution.
• Trust assets might be used as collateral on a loan to the child outside the trust.
• A loan could be made from the trust.

Another option is a Qualified Personal Residence Trust (QPRT). This involves transferring or gifting a home into a trust for a limited time, and then your child would own the home once the QPRT expires.

A QPRT reduces transfer taxes when compared with an outright gift, due to the donor’s ‘use’ period. The idea is to freeze the value of the residence when it’s originally contributed to the trust, which might result in significant tax savings over time.

If you use a QPRT, you have the option of leasing the home back from your child (if they no longer live there) when they receive the home at the end of the trust’s term. You can then live in the home and lease it at fair market value.

Discussing the details of your QPRT before the trust term ends should, ideally, prevent any misunderstandings between you and your child.

Understand the impact of capital gains tax.

Keep in mind that your child could owe capital gains tax when selling the home if it has appreciated in value. In most instances, capital gains tax is due on any home sale profit of more than $250,000 for single filers and more than $500,000 for married couples filing jointly. The home must be considered a primary residence to qualify for these exemptions. If it is considered a rental property, the entire profit is subject to capital gains tax.

Consider the tax benefits of renting out the house.

There are numerous tax deductions your child could take if they choose to rent out the house. These include:

• Mortgage interest: This is considered a business expense and is tax-deductible on your child’s federal income tax return.
• Depreciation: A rental house is considered a business asset, so depreciation can be deducted over a period of 27.5 years to recover the cost of wear and tear on the property.
• Property taxes: Landlords sometimes overlook property tax deductions for their rental properties.

Repairs and maintenance: Whether it’s fixing a broken garbage disposal, fence or garage door, repairs and maintenance performed on rental houses are tax-deductible. Note that some big-ticket items like new HVAC systems and roofs must be capitalized instead of deducted during the year they’re purchased.

Weigh the pros and cons of buying a house for your child to live in

Buying a house for your child represents a big financial, personal and familial commitment, so carefully weigh the pros and cons, including the tax implications, before doing so. Be sure to speak with your financial and tax advisors before making a decision.

Learn how we can help you define and work toward your financial goals.