Personal Finance

I want to transfer up to $250k to help my child with a down payment on their house - what's the most tax-efficient way?

John Seetoo

Published: January 22, 2025 10:45 am

President Trump’s 2017 Tax Cuts and Jobs Act delivered impressive economic growth and benefits to millions of Americans. One of the crucial aspects of TCJA that helped countless families who owned small businesses were Trump’s modifications to the Estate Tax (aka “Death Tax”) and the Gift Tax. By doubling the lifetime gift tax exemption (for estates) and increasing the annual exclusion (for recipients), many families were able to help their children with major purchases, like a new home, or pass on their business as part of their estate without being forced to sell it in order to pay for estate taxes. 

Helping One’s Kid Buy a First Home Without Paying Uncle Sam To Use Your Own Money

One Reddit poster found himself in a comparable dilemma. With the goal of helping their child and spouse acquire their first home, the poster and his wife wanted a way to supply them with the $250,000 required for their down payment – but without triggering high gift taxes.  

The poster’s original plan was to transfer a block of stock to the couple’s account as a gift, but was unsure as to how to deal with capital gains, vs. giving cash. He also was open to other strategy suggestions. The respondents replied with a variety of strategies. Fortunately for the poster, there were several categories through which his goal could be attained, with some more complex than others. The tax considerations are predicated on the poster and his wife operating as separate donors and the child and spouse also being treated separately, in order to maximize the legal deductions.

Loophole Options

Cash Gift – The cash gift scenario would apply against the lifetime gift tax exemption cap amount, which stands at over $13 million, thanks to a COLA. The annual gift tax exclusion per recipient is $19,000. 

• The poster and his wife each give 2 gifts to the child and spouse. 
• 4 x $19,000 this year, 4 x $19,000 the following year. 
• Each year’s $76,000 satisfies the gift exclusion cap per recipient. ($158.000 tota;)
• Loan the couple the $92,000 differential at 4% interest.
• Report the 4% interest as income and the poster pays tax on it.
• Forgive the principal on the loan and treat it as non-recourse.

Stock Gift – Gifting stock offers the couple the benefit of a cost basis calculated at market as of the date and time of the transfer. They would be liable for any capital gains taxes above that amount. The downside is that the size of the stock gift gets applied against the lifetime estate exemption, which may or may not be to the poster’s advantage.

Mortgage Loan Finance – Provided the poster has the financial wherewithal, he and his wife could front the down payment.

• Poster pays the house down payment.
• The couple signs a 30-year mortgage agreement with the poster and his wife, comparable to one with a bank.
• The poster and his wife gift the mortgage amount and taxes to the couple each year for 7 years.
• The couple gets the mortgage deduction and housing cost relief for several years, plus home equity.
• The poster and his wife pay minimal taxes on the interest.

Trust Inheritance – Again, provided the poster has the wherewithal, a trust can be established, which would be part of his family estate.

• Poster and his wife simply buy the house outright and place it in a trust. 
• The trust holds the property and can transfer ownership to the couple at the poster’s and wife’s discretion. It could be done as an inheritance, as a loan/purchase, or other structure. 

TCJA was a crowning achievement of President Trump’s first term in office. Now that he is once again POTUS, he may very well make good on his pledge to abolish the IRS and replace it with a combination of consumption taxes and tariffs. If such a scenario came to pass, it would render much of the finagling over federal taxes a moot point. Therefore, monitoring news developments would be a prudent habit to start if taxes are a concern.