The post-pandemic spike in home prices, elevated mortgage rates and persistently rising costs have made paving a strong financial foundation feel increasingly out of reach for many young people. With the transfer of wealth barreling ahead, some parents and grandparents are looking for ways to help ease some of the cost burdens associated with buying a home, rather than waiting to pass wealth to heirs later on.
This generous gesture still needs to be carefully considered and strategic, since not all families are in a financial situation to part with large portions of their retirement savings if their principal investments are maintaining cash flow. Financial support is very much like the airplane safety instructions you receive before takeoff — always put your oxygen mask on first before assisting others.
Tax and mortgage implications
Homeownership is fast becoming a difficult milestone for young adults. In a supply-constrained housing market, all-cash home purchases have become increasingly common. According to the National Association of Realtors, homebuyers who paid cash accounted for 32% of home sales in January, marking the highest rate since 2014. Many buyers bring in equity from previous homes, making it more challenging for first-time homebuyers to compete.
Based on your net worth, you could end up with more money in retirement than you could ever spend.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In these scenarios, it can be easier to part with a down payment or lump sum of cash for a family member to use for a home purchase. However, gifting funds over a certain amount can have considerable tax implications for you and the recipient and, in some cases, may not be allowed by mortgage lenders. That’s why it’s important to think about and plan for an allocation of cash, or other ways to relieve a financial burden, in advance.
Strategy one: Selling assets
Many of the clients I work with are accustomed to saving and have been tucking money away for most of their lives to live comfortably in retirement. This mindset is still important, but for many fortunate retirees, their savings far eclipse their estimated financial need. This has allowed us to explore real-time gifting strategies to help relieve some of the pressures that first-time homebuyers are facing, especially in some hot markets like the Washington, D.C., area.
If your investment portfolio is strong, you may consider raising cash by selling some of those assets to provide the necessary funds for a down payment and closing costs. While this approach may incur capital gains taxes, it can be a straightforward way to generate cash and get started.
Strategy two: A securities-based loan
If you prefer to avoid selling your investments due to the risks involved, you might consider taking advantage of a securities-based loan. This type of loan allows you to borrow against the value of your investment portfolio. With this option, you can maintain your investment portfolio with no immediate tax liability; but if the value of your portfolio decreases significantly, you may be forced to sell or add cash to maintain the loan.
Generally, this can be a solution in a shorter time frame, so if the intent is for the child to make an all-cash offer and then get a mortgage and pay you back, borrowing against your investment portfolio may be an efficient choice.
Get expert advice
Each of these approaches can help the next generation gain a solid financial footing. By leveraging thoughtful strategies for assisting with a home purchase, you can make a significant impact on their future with an investment in an appreciating asset.
It is wise to consult with a financial adviser and tax professional to tailor these approaches to your unique situation so you are not jeopardizing your own stability. With careful planning, you can empower the next generation to build a financially prosperous future.
Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor. No information, including but not limited to written materials, provided by RBC WM should be construed as legal, accounting or tax advice.
Securities-based loans involve special risks and are not suitable for everyone. You should review the provisions of any agreement and related disclosures and consult with your own independent tax and legal advisors about any questions you have prior to using securities-based loans or lines of credit. Subject to credit approval. Additional restrictions may apply. Lending services may be offered by bank affiliates of RBCWM-US. RBCWM and/or your advisor may receive compensation for offering or referring these services. RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
Related Content
-
What’s Happening With Trump’s Tariffs? Key Updates for April 2025Tariffs Donald Trump continues to use tariffs as a central tool of his trade policy. Here’s where tariffs stand now.
-
New South Carolina Income Tax Cut Might Eat Your CashState Taxes South Carolina’s flat income tax bill could have the majority of residents paying higher income taxes. Find out how.
-
Winning Strategies for Financial Advisers as Clients' Lives EvolveHow can the wealth management industry help make life transitions easier for the adviser and the client?
-
How Advisers Can Establish Relationships With HNW ProspectsThese strategies can help to build influence with high-net-worth individuals, who are often looking to an adviser for insight rather than solutions.
-
When Your Car Is Fixed, But You've Still Got the ProblemThis reader's experience with trying to get squealing brakes fixed under an extended warranty mirrors what others are experiencing these days.
-
Stock Market Today: Dow Rises 854 Points From Its Intraday LowIf there's one thing markets hate, it's uncertainty. But uncertainty is all they're getting these days.
-
Are You a Retirement Millionaire Who Is Too Scared to Spend?If you are too scared to spend money in retirement, you may be saddled with regret. Here are three ways to safely enjoy your sizable retirement nest egg.
-
Bigger Social Security Checks Are Arriving in AprilPayments to eligible retired public sector employees will increase starting in April due to the Social Security Fairness Act (SSFA)..
-
Seven Questions to Ask When Evaluating Personal Loan OptionsTaking out a personal loan too hastily could lock you into unfavorable terms with an untrustworthy lender. Ask these questions before signing anything.
-
Return to Your Home Country to Retire: Repatriation RetirementThey came to the U.S. to live and work, but they want to retire in the old country. Here's how to juggle the move back home.
