Mortgage Bank of Mom and Dad

published 1 September 2007

Should we help out with the down payment on our son's first home?

In formerly hot markets, especially where condos are rife, parents should think twice before forking over money to young and restless kids now that quick appreciation is less likely. But if your son expects to own the property for at least a few years, fine. Even with your gift, lenders may require him to come up with a chunk of change.

The IRS allows you to give your son (or as many people as you want) up to $12,000 annually without worrying about the federal gift tax. So, along with your spouse, you could give $24,000, or a 10% down payment on a $240,000 property. Your son won't have to pay any tax on it. But although he may be your favorite charity, you can't deduct the gift on your income-tax return.

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The lender will require you to document the gift, according to its specifications. That generally means providing a "gift letter" stating that the sum needn't be repaid. Lenders want assurance that the "gift" isn't a loan in disguise. The lender will also ask for proof of transfer -- say, a canceled check and deposit slip, or if your son deposited the money earlier, a few months of account statements.

Esswein joined Kiplinger in May 1984 as director of special publications and managing editor of Kiplinger Books. In 2004, she began covering real estate for Kiplinger's Personal Finance, writing about the housing market, buying and selling a home, getting a mortgage, and home improvement. Prior to joining Kiplinger, Esswein wrote and edited for Empire Sports, a monthly magazine covering sports and recreation in upstate New York. She holds a BA degree from Gustavus Adolphus College, in St. Peter, Minn., and an MA in magazine journalism from the S.I. Newhouse School at Syracuse University.