Many families wish to help their children take the important step of purchasing a first home. There is no single “best” approach—each method involves different tax, legal, practical, and emotional considerations, as discussed below.

1. Outright Gift of the Entire Residence.  The simplest approach is to make a gift of the residence (or the necessary funds to purchase the residence) directly to your child.  Beyond simplicity, this approach is likely to be the most attractive to your child in terms of the emotional benefit of owning the home one lives in.  But outright ownership by the child potentially exposes the home to the claims of the child’s creditors or divorcing spouse.  The gift will use some of your lifetime gift exemption, but of course this can be good planning as it removes appreciation on the residence from your taxable estate at your death. 
2. Gift or Loan of the Down Payment Only.  Under this approach, you furnish the downpayment funds only, in the form of a gift or a loan.  Your child takes out a commercial mortgage for the balance.  Your child has the same emotional benefit of owning his or her own home as under the first approach. But it suffers from the same creditor and divorcing spouse problems associated with the first approach.  Moreover, some commercial lenders will balk at providing a mortgage if the downpayment is made with borrowed funds.  And loans between parents and children raise the potential for family friction if the child fails to make the required payments on the loan.
3. Loan of Entire Purchase Price.  Under this approach, you lend the purchase funds to the child in return for the child’s promissory note.  The interest rate can be the lowest rate published by the IRS for the month in which the loan is made; the IRS rate typically is lower than rates offered by commercial lenders.  If the loan is secured by a mortgage, the child may be able to deduct all or a portion of the interest payments.  But you will report taxable income on the interest payments made (or deemed to be made) to you each month.  This approach provides the emotional benefit of home ownership, but raises the same creditor and divorce exposure and family friction risks as approaches (2) and (3). 
4. Creation of an Irrevocable Trust to Own the Residence.  Under this approach, you make a gift to an irrevocable trust for the benefit of your child and the trust purchases the residence.  The trust can be structured to protect the residence from the claims of the child’s creditors or divorcing spouse.  It avoids the potential family dynamics issues associated with loans and removes appreciation on the residence from your taxable estate.  But it entails the administrative cost and complexity of a trust.  Also, in our experience, most financial institutions will not approve a loan secured by an asset  held in trust, so the use of a trust is generally attractive only if the trust is providing 100 percent of the purchase price.
5. You Purchase the Residence in Your Own Name and Allow Your Child Rent‑Free Use.  This approach does not give the child the financial, emotional and income tax advantages of home ownership, but is the simplest to implement and does not present the risk of exposing the asset to the child’s creditors or divorcing spouse.  There is some risk that the child would be treated as receiving imputed income for the benefit of rent-free use of the residence but in our experience this issue is not enforced by the taxing authorities[1].

If you have questions please feel free to reach out to your Wiggin attorney.

[1] We have occasionally assisted clients with arrangements whereby parent and child co-own the residence either as joint tenants or as members of a partnership or LLC.  However, the benefits of this strategy are typically outweighed by the structuring and administrative cost and complexity it entails.