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Law Offices of Ronald W. Rutz
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July 27, 2005: Buying a House with a Child

Q: I want to help our daughter buy a place in which to live while attending CSU. How should we set things up?

A: That all depends upon your intentions. Is the transfer to be treated as a gift or a loan? Do you want to split any equity appreciation? Will you front the entire purchase price or will money be borrowed? Will you need to co-sign? Would it be better that you buy the home and rent it to her?

Sorry for muddying the waters but you need to have a clear idea on what your objectives are before the paperwork can be constructed.

Normally the money transferred to her is considered a loan, not a gift, in order not to benefit one child over the others. Also by treating the transfer as a loan, the gift tax restrictions and paperwork can be avoided. If later you want to convert it to a gift, you can always forgive part or all of the loan at that time. If you should die, then the promissory note can be distributed to your daughter as part of her inheritance, thereby balancing out the estate so everyone is treated the same. It also will moot any arguments as to whether the transfer was a gift or a loan. Thus usually the child will sign a note and give the instrument to the parent.

Next your child probably would not qualify for a real estate loan unless you co-sign. Thus you need to be prepared to pick up any default payments and remember that even if you never have to step forward and pay, this is a financial obligation that could affect your efforts to secure future loans.

What about holding title? If sharing in the appreciation is a goal, then the title should be in both names. If one of you dies and the desire is for the deceasedŐs equity to go to the other, put title in joint tenancy. If the desire is to let the deceasedŐs equity to be distributed as part of his or her estate, then put title in tenants in common. Also note that here in Colorado, the ownership interest does not have to be 50/50. For example it could be 90% and 10% using either joint tenancy or tenants in common.

There are several other advantages to being on title. If she stops making payments, you can cure any default and stop foreclosure. You will be in the loop to be alerted if such things as insurance, taxes, assessments, etc. are not paid. If she goes off the deep end and wants to sell, she can only unload her share and at least your part will remain for you. But few buyers would be interested unless the entire property could be purchased, thus effectively stopping her efforts to cash out. If her creditors levy on the property, they would only have access to her share. If she adds her current boyfriend to the title, again only her share is affected. I could go on but I think you get the picture.

I would suggest that your promissory note be secured by a second deed of trust behind the first deed (the money borrowed to buy the property). That way the note can act as a cushion further protecting equities from many kinds of subsequent liens or to discourage your daughter from pledging her share of the house equity to her creditors. Your second would also act as a safety net in a foreclosure to at least permit you to step forward and redeem (payoff) the first, eliminating the liens behind you in taking title to the house.

Well you know how we attorneys are, I could go on and on but letŐs quickly reflect on one alternativeŃyou buying the house and "renting" to your daughter and her friends.

Many families do just that, thereby avoiding many of the pitfalls that are possible by putting a childŐs name on title. But the child would not have the investment, nor would he or she have a credit history building during the period of ownership. But this approach is used if ownership would jeopardize eligibility for any school loans, grants, or even scholarships.

Need to stopŃout of space. After evaluating your objectives, think through how your child, the family, and you would be affected. Otherwise, there could be many unhappy "surprises" awaiting out there.

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