The first thing NFL players often do after signing their big rookie contract is buy their parents a house. If your income has already far outpaced the amount your parents make, you may have thought, “Can I help my parents buy a house?” Imagine being able to tell your mom what is and isn’t acceptable under your roof and telling your dad to shut the front door, because you don’t need the whole neighborhood to hear. Even better: doing that without actually having to live with them.

Of course, buying your parents a house is often more complicated than it should be. The IRS has gift limits each year. You have to decide whether to buy the house outright, co-sign a mortgage, or take on the mortgage by yourself and rent the house to your parents. Let’s go over how these processes work.  

What are your options to help your parents buy a home?

Gift the down payment and co-sign the loan

IRS gift limits state that you can’t give more than $16,000 (in 2022, check back in with this IRS webpage in future years to see the new amount) without facing the wrath of the IRS (unless you’re married, in which case you can give double that amount). But that annual exclusion amount is misleading. 

You won’t automatically have to pay taxes next year if you give more than $16,000 to someone in 2022. Any amount over $16,000 will be subtracted from your lifetime exclusion amount of $12.06 million. If you were looking to give that level of down payment to your parents, stay tuned for the article on How to Buy Your Parents a Compound.

That means you can give whatever it would take to make a normal 10% to 20% down payment to your parents and not have to worry about taxes. You’ll have to file extra tax forms and when you die, your heirs may have to pay more tax than expected on your estate—but only if you’re actually certified rich. Mortgage lenders have different requirements for accepting gifted down payments, so look out for that too.

The next part of the equation is co-signing on the loan. If your parents don’t have the income or credit score to qualify for the loan on their own, they may be able to get it if you co-sign the loan for them. 

If you do this, they will still be liable for payments, but you will be too. If they miss a payment and it goes 30 days late, your credit score will be affected. If one of your parents gets a terminal disease and starts cooking meth in the house à la Walter White, you’ll be the one paying for disaster cleanup to sell the house and pay off the loan.

Not all parental relationships have this level of trust. It’s possible that you love your parents enough to want to buy them a better place to live, but you don’t trust them enough to expose your credit to them. You could always simply buy them the house.  

Buy your parents a house

Here’s the NFL player strategy. Just buy them the house, report the amount you gave them to the IRS and then you’re off the hook. You don’t have to worry about your parents missing a payment or destroying the collateral on a loan that you guaranteed. You’ve done a great thing for your parents and now you can all live happily ever after. 

Of course, there is a way that you can buy a house for your parents, and also save a ton on taxes. 

Buy a house and rent it to your parents

The best-case scenario for both you and your parents may be for you to buy a house as an investment property and rent it to them. They get a nice house to stay in and you get a bunch of expenses to write off. 

When you rent out a house, you can expense interest, maintenance, depreciation, HOA fees, gas used to drive to the house, and even the expenses you incur looking for the house. The catch is that you have to charge market rent. 

If you don’t charge a market rate for rent, the IRS may determine that the house is not a true rental property and disallow any write offs. This may be a stumbling block, but it doesn’t need to be one. 

Fair market rent has a wide range of possibilities. It is normal to give the first few months free or reduce rent for a long-term lease. You don’t have to prove that you’ve sucked every penny out of your parents. Just that they pay a respectable amount of rent. 

And you’ll likely still be able to report a loss on the property, at least in the early years of the loan. Interest and depreciation are so high at the beginning of a loan that it is rare for the property to show a tax profit even if you’re a slumlord charging the most that the market will bear. 

Home sweet homes

Buying a house is a huge undertaking and buying one for your parents may add an additional layer of complexity to the process. No solution will be perfect for everyone. 

For some families, the best thing to do will be to simply buy the house and put it in the parents’ names. Others trust their parents enough to co-sign a loan. Whatever you do, take the time to make sure it’s the best way to do it for yourself—not just your parents.