"The No. 1 way a parent can help their children is to offer them the gift of knowledge," Penn says. "Parents rarely have serious money discussions with their children, and throwing money in their direction now may be doing more harm than good. Parents should be talking to their kids realistically about the hidden costs of homeownership like utility payments, maintenance and repairs."
The real estate deal
The simplest way parents can help their kids financially is with down-payment money.
"Lenders want to know if the money is a gift because if the parents are treating it as a loan, it will be considered a second loan on the home," says Dan Kruse, broker and president of Century 21 Affiliated in Madison, Wis.
Individuals can give $13,000 tax-free to another individual each year, Ivory says, so if two parents each give their offspring and their offspring's spouse the maximum, they can give a total of $52,000 tax-free.
Kruse says parents often buy a home as an investment and have their kids pay rent.
"The parents can then sell the home to the kids when they are ready, keep it as an investment property or sell it to someone else," Kruse says. "You can do this with two separate transactions, or you can make a rent-to-own arrangement with the parents giving the kids a rent credit toward the purchase."
Ivory says a lease-to-own arrangement requires consultation with a tax professional as well as a lender, and must include a written contract.
Even within the family, financial planners say it is crucial to have everything in writing to make sure there are no misunderstandings in the future about repayment plans or the consequences of a loan default.
Parents with enough cash can lend the entire mortgage to their offspring, but this too should be in writing and include a reasonable interest payment. "Everyone needs to pay attention to the law and to the tax consequences of any financial arrangement," says Ivory.
Most financial planners view co-signing a loan as the worst option because of potential damage to the parents' credit and cash flow if the kids cannot make the payments.