Helping a Child Buy a Home Without a Gift Tax Surprise
A down payment, a co-signature, a family loan or an outright purchase each has a different gift tax result. The annual exclusion and a properly documented loan can do most of the work if the structure is set before the money moves.
Parents are stepping in to help adult children buy homes. Sometimes that means a down payment, sometimes co-signing, sometimes a family loan, sometimes buying the house outright. The Wall Street Journal captured the human side of the trend well: housing affordability has put ownership out of reach for many younger buyers, and parents and grandparents with accumulated wealth want to help now rather than only at death. One issue deserves more attention than it gets: the gift tax.
When help is a gift
If parents buy a house for a child, hand over cash for a down payment, or later forgive a loan to the child, the transfer is a gift. That rarely means gift tax is owed, because the lifetime exemption is $15 million per person in 2026, but a gift above the annual exclusion requires a Form 709 gift tax return and uses part of that exemption.1 Co-signing is different. A guarantee is generally not a completed gift when signed; it becomes one only if the parent actually pays.
The annual exclusion
Each parent can give $19,000 per year to each child free of gift tax and without a return, so long as the gift is of a present interest. Married parents can give $38,000 to a child, and if the child is married, another $38,000 to the child's spouse, for $76,000 a year to the couple without touching exemption.2 For a down payment that does not need to be made in a single calendar year, gifts in December and January can double the amount transferred in a few weeks.
The documented loan
Where the amount is larger than the exclusions allow, parents can lend the money under a written promissory note bearing interest at least equal to the applicable federal rate for the month and term of the loan. A loan at the AFR is not a gift, and the AFR is well below mortgage rates.3 The child must actually pay the interest, the parents must report it as income, and the loan should be secured by a recorded mortgage if the child wants to deduct the interest as qualified residence interest.
In later years the parents may choose to forgive principal in amounts that fit within the annual exclusion. One practical version divides part of the loan into separate notes of $38,000 each, has the child pay AFR interest on all of them, and forgives one note each January as a gift of that year. The caution is that the forgiveness must be a genuine yearly decision, not a plan fixed at the outset. Where the Service can show that the lender never intended to collect and the notes were simply a device to spread a gift across years, it treats the whole amount as a gift when the loan was made.4
The basis question
How the house is titled matters for income tax as well. Property received by gift takes the donor's basis, while property inherited at death takes a basis equal to its date of death value.5 A parent who buys a house in his own name and gives it to a child later hands over his low basis. A child who buys with gifted cash owns a house with a basis equal to its price. For a highly appreciated property the difference can be large, and it argues for giving cash or lending rather than giving the house itself.
The checklist
- Is the transfer a gift, a loan or both?
- Is the loan documented, secured and bearing AFR interest?
- Is interest actually being paid and reported?
- Will a Form 709 be required, and has it been calendared?
- Are both parents' annual exclusions, and the child's spouse's, being used?
- Does the plan preserve the parents' own retirement security?
Helping a child buy a home is a wonderful goal. Done carelessly, it creates avoidable tax and family complications. The best time to structure the transfer is before the money moves.
Notes
- I.R.C. sections 2501, 2503(b), 2505 and 6019; Rev. Proc. 2025-32. ↩
- I.R.C. section 2503(b); Rev. Proc. 2025-32 (2026 annual exclusion of $19,000). Spouses who elect to split gifts under section 2513 are each treated as making half of every gift. ↩
- I.R.C. sections 7872 and 1274(d). The applicable federal rates are published monthly by the Service. ↩
- Rev. Rul. 77-299, 1977-2 C.B. 343. ↩
- I.R.C. sections 1015 and 1014. ↩
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.