Three Ways Parents Can Help with a Down Payment
At some point, a lot of parents find themselves in the same conversation: Their kid has found a house, the numbers almost work, and there’s a gap between what they have saved and what they need to close.
“Can we help?” you ask.
Usually, yes. But how you help matters.
The three most common ways parents step in — a cash gift, a family loan, or a gift of equity — have different financial footprints. Done right, any of them can be a meaningful, generous move. Done without thinking it through, any of them can create headaches at tax time, complications at the mortgage lender, or awkward family conversations.
Here’s what to understand before you write a check (or sign a promissory note).
Option 1: The Outright Cash Gift
This is the most common approach: Mom and Dad write a check, the child uses it for a down payment, end of story. Except it’s not quite end of story.
The good news is that the recipient — your child — owes no income tax on a cash gift. That’s clear and consistent under federal tax law.
For the giver, though, there’s more to know. The IRS sets an annual gift tax exclusion each year. In 2026, it’s $19,000 per recipient. That means a parent can give up to $19,000 to a child without any gift tax reporting requirement. If both parents give, that doubles to $38,000.
What happens if the gift is larger? Say the gap is $80,000, and you and your spouse want to contribute the full amount together. The portion above $38,000 isn’t immediately taxed. It just reduces your lifetime gift and estate tax exemption (currently $15 million per person in 2026). For most families, that’s not a problem. But it does require filing a gift tax return, and it does eat into what can eventually pass to heirs tax-free.
Here’s the part that surprises many people: The lender needs to know about the cash gift. Mortgage lenders require a formal gift letter that confirms the money is a gift, not a loan, and that you have no expectation of repayment. They’ll also want to trace the funds through bank statements. If the money shows up without documentation, it can stall or sink an approval. Getting the paperwork right before the funds move is worth the five extra minutes.
One California-specific note worth knowing: California has no state gift tax. The only gift tax considerations here are federal. That’s one less thing to worry about.
Option 2: The Intrafamily Loan
Some parents are generous but also practical. They want to help their child buy a home, but they also want the money back eventually, maybe because they’re still building toward their retirement or because they think a loan teaches something a gift doesn’t. An intrafamily loan can make sense in that situation.
But here’s where it gets important: For the IRS to treat a loan as a loan (and not a disguised gift), it has to look like a loan. That means a written promissory note, a fixed repayment schedule, and interest. Not just any interest — but at least the Applicable Federal Rate (AFR), which the IRS publishes each month and sets the floor for what qualifies as a real loan. If a family loan charges less than that floor, the IRS can impute the difference as additional income to the lender and a gift to the borrower.
The good news is that the rate is generally lower than a commercial mortgage, which is part of the appeal. But it’s not zero, and it’s not a handshake. The documentation requirements are real.
There’s also a mortgage angle to consider. Lenders treat a family loan differently from a gift. Because your kid has to repay it, the payment will show up as a liability in their debt-to-income ratio calculation, which can affect what they qualify for. The terms and repayment structure need to be clearly documented for the primary lender to evaluate the full picture.
One more thing worth naming: Family loans can change relationships. Some families handle it fine. Others discover that mixing money and obligation creates friction, especially when life circumstances shift, like a job change, a medical expense, or a divorce. Before going this route, it’s worth being honest about whether the family dynamic can support it.
Option 3: The Gift of Equity (When the Parent Owns the Home Being Sold)
This one is less common, but it comes up more often than people may expect, particularly in California, where parents may have lived in a home for decades and accumulated significant equity.
Here’s the scenario: You want to sell your home to your child. Rather than selling at full market value, you agree to sell at a lower price and treat the difference as a gift. That gap — the discount — is called a gift of equity, and the lender can often apply it as the down payment.
Let’s say a home is worth $900,000, and you sell it to your child for $800,000. The $100,000 difference is a gift of equity, and the lender may treat it as a $100K down payment on the loan. For a child who doesn’t have cash to put down, this can be the path that makes homeownership possible.
The tax picture has a few layers, though. For the parent-seller, gift tax rules apply to the equity transferred, the same annual exclusion and lifetime exemption framework described above. A formal appraisal is needed to establish the fair market value. And the sale still needs to be structured as a real transaction: proper purchase agreement, title work, everything.
For the child-buyer, there’s a future consideration to be aware of: A gift of equity means they take over a lower cost basis in the property. If they sell the home years later for a gain, their taxable gain will be calculated from that lower basis, potentially triggering a larger tax bill than if they’d purchased at market value. That’s not a reason to avoid the strategy, but it is something to factor into the planning.
There’s also a property tax dimension specific to California. An intra-family sale, even at a discount, is still a change of ownership, and that generally triggers a reassessment of the property’s taxable value under Proposition 13. The new assessed value will typically reflect current market value, not the low base the parent had been paying taxes on for years. Families who don’t anticipate this can face a significantly higher property tax bill after the transfer. It’s worth factoring into the math before the deal closes.
In California, this conversation often leads to questions about Prop. 19 and what happens to the property tax assessment. We wrote about that in the context of senior care transitions, but the same rules apply here and are worth understanding before any transfer.
How This Fits into the Bigger Picture
A down payment gift of any kind isn’t just a transaction. For most families, it’s a meaningful transfer of wealth, one that has implications for the parents’ retirement timeline, estate plan, and tax situation.
We see this regularly in our work with clients. They’re excited to help a son or daughter buy a home, but they haven’t fully modeled what that transfer does to their own plan. Sometimes it’s fine. Sometimes it shifts the retirement start date. Sometimes there’s a cleaner way to structure the help that accomplishes the same goal with less tax exposure.
The question worth asking before any of these options: Have you run the numbers on your own plan first?
We Can Help You Think This Through
Evermont Wealth’s real estate services are built to connect real estate decisions directly to your financial plan. Whether you’re thinking about gifting a down payment, setting up a family loan, or helping a child buy a home you already own, we can help you understand what it means for your full picture — before any money changes hands.
If you’re already a client and this is on your radar, bring it up at your next conversation. If you’re not yet a client, we’re happy to help you think it through.
Schedule a chat at evermont.com or call us at 909-296-7977.
Keep building your future.
This material was written in collaboration with artificial intelligence (Claude) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.