Parents selling home to children: Is this the right move?

Q: My ex and I are thinking of selling our paid-off home to our two children. Then, both of us would purchase our own places. We would give them a much better deal than they could get on the open market.

What are the pros and cons of doing this? Thanks in advance. 

Kids on title to house? Another take

A: We wish you had included some additional information in your email. For example, how old are your (grown, we assume) children? Do they have spouses or significant others? Do they expect to live in the home or rent it out? Will only one of your kids live in the home and not the other? Is the house in a place where at least one child might want to stay permanently, or at least for 10 to 15 years?

Since we don’t know the ins and outs of your family situation, we’ll just start by saying this is an idea that could work well, depending on some of the timing and other issues and questions we just raised.

We assume you bought your marital residence a long time ago. It’s paid off, so the carrying costs (maintenance and taxes) should be relatively cheap. If your kids need an affordable place to live in their early adulthood, they don’t mind living together in this property, if it’s near enough to where they work (or they’re remote), if you and your ex don’t need much money out of this house (or are looking to transfer assets to your children), and if they can afford to buy the home or at least make mortgage, taxes and insurance payments on their current income, then it could make financial sense. 

That’s a lot of ifs.

On the plus side, selling your house to your kids (as opposed to giving it to them) has a lot of benefits, especially if you’re going to hold the mortgage. You’ll get a higher rate of interest on your cash than you can almost anywhere else. You know the borrowers, so you should know if you can trust them to make regular payments. If something happens, and they miss a payment, you’ll help them avoid trashing their credit, unless you’re reporting those payments.

Buying a home from you does offer your kids a big leg up financially, especially since it’s so expensive to buy a house right now. Gen Zers and Millennials are having trouble qualifying because of high interest rates and sky-high housing prices. Allowing your kids to buy in at a lower rate and build equity will give them a boost financially, especially if you’re allowing them to lock in at a lower interest rate or you’re selling the home for less than you could get on the open market. 

As Ilyce has written in her books, “The younger you are when you buy your first house, the wealthier you’ll be later in life.” We believe that to be true, and you’re helping your kids get there. They’ll realize appreciation on the house and hold down their cost of living expenses. That part is a win-win.

What about the down side? There is just one big one for you and your ex: You’ll get less cash out of this asset. If you’re property-rich and cash poor, you won’t be able to tap into the equity to buy your new separate homes. That may not be much of an issue, but it might be for others contemplating the same thing. 

Also, while you and your ex-spouse can each keep up to $250,000 in profits tax free when you sell, you may owe tax on anything above that amount. You will also have to report income from the mortgage on your federal and state (if you have one) tax return. Finally, what happens when your kids want to refinance and pay off your mortgage? Will you be okay with that?

From your kids’ point of view, the house may not be near their friends, their jobs, or the activities/nightlife they would prefer. The property may not be upgraded or refreshed, and they’ll be living in their childhood home. Their cons are more about location and emotional attachment than anything else.

A final thought – are your children close? Are they able to mesh their adult personalities enough to adjust to living together for the next five to 10 years? How will they hold title to the property? Are they mature enough to work out their disagreements amicably? What happens when one wants or needs money and decides to sell the home? 

They should treat this purchase as the significant investment that it is and sign a partnership agreement. This agreement should spell out what happens if one wants to stay and one needs to sell, or if they decide to renovate or rent the property long-term.

Perhaps one child takes a job in another state and the other can’t quite afford to carry the property on their own income. Or, one child gets married and wants to buy out their sibling. All possibilities should be thoroughly explored, with resolutions spelled out in the agreement, right down to how the valuation of the house will be determined when the time comes.

If these conversations are above board, and your children want this and go into it with the right attitude, there’s no reason it can’t be a win-win for everyone. But there are lots of ifs and questions that need to be answered before you decide to go down this route. 

Good luck.

Glinkonomics: Raising Money-Smart Kids

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