Loans between family members and gifts are the two ways to help children purchase a home. However, both options have tax implications that you should be aware of to avoid any surprises.

Independence always marks the beginning of a new phase. The transition to adulthood has traditionally coincided with the purchase of a home, although over the years, gaining access to a home has become increasingly difficult, particularly for young people.

Although self-employed workers don’t have it particularly easy either, it’s no secret that young people face the most obstacles when it comes to buying a home—a claim backed by data.

According to the latest report from the Spanish Youth Council, covering the first half of 2020, only 17.3% of young people between the ages of 16 and 29 have left their parents’ homes. The causes can be found, among other factors, in the high youth unemployment rate and the prevalence of temporary employment.

In many cases, these issues make it difficult to obtain financing from banks, but they also make it difficult to come up with the minimum 30% down payment that, in most cases, is required to finalize a real estate transaction.

In this context, giving a child money to buy a home seems to be one of the most feasible ways to start this new chapter, thereby leaving the family “nest” or, in most cases, a rental. However, the issue is not without nuances that can complicate the goodwill behind the gesture.

In practice, there are two possible ways to provide the money needed for a down payment (the most common) or a purchase: a gift to a child for their first home or a loan between family members.

Both approaches have implications that do not go unnoticed by the administration, and it is advisable to address them to avoid problems with the Tax Agency.

Giving a Child Money to Buy a Home: Everything You Need to Know

Giving money to a child with the expectation that it will be repaid is much like a standard loan. This arrangement is relatively common when the parents’ financial situation allows it and the bank denies the child part of the financing (or the child does not have sufficient savings).

These types of loans between family members typically have specific terms, such as no interest, grace periods, or more flexible repayment schedules, among others.

Regardless of the specific terms agreed upon when lending money to a child, the arrangement involves rights and obligations that you should be aware of to avoid problems with the tax authorities.

In other words, to avoid tax surprises (or potential family disputes in certain cases), it is advisable to formalize the agreement through a contract that includes, among other things:

• The amount of the loan and whether or not interest is charged.
• The deadlines for repaying the loan, as well as the agreed-upon installments to be paid periodically.
• Any specific provisions regarding refunds, if applicable (extensions of the refund deadline, the option to make early payments, etc.)
• Guarantees associated with the loan (if any), as well as the procedures to be followed in the event of default by the borrower.

Aside from the formalization of the contract, giving money to a child to purchase a home through a loan entails certain tax obligations that, in this case, apply only to the recipient of the contribution, provided the agreement does not include interest. The Tax Agency allows a 30-day period from the signing of the contract to file a tax return; not surprisingly, the tax authorities consider this type of agreement to be a transfer of assets for consideration.

For this reason, it is mandatory to file the Property Transfer and Stamp Tax return; however, since the transaction is exempt from taxation, no payment will be required to the Tax Agency.

However, to report the loan, you must fill out Form 600 and attach a simple copy of the contract. This documentation will serve as proof that, in this case, you are choosing to “lend” the money to a child rather than make a gift.

If the loan bears interest, the borrower must report it on their annual tax return as income from real estate.

Gift to a Child for a First Home

Another way to help a young person become a homeowner is through a gift. This alternative to giving a child money for a home is simply giving them the specified amount as a gift.

There is no expectation—nor any requirement on the part of the lender—that the loan be repaid, as is the case with family loans; consequently, the tax implications are different.

In the case of a gift to a child for a first home, the money is subject to gift tax, a tax that has been devolved to the autonomous communities, resulting in a tax burden that varies significantly depending on the region.

In fact, the borrower will be taxed in their place of residence (unless the donation involves a home) and, unlike with loans, in most cases it will be necessary to consult a notary to formalize the donation.

As a general rule, the tax is subject to a fixed federal rate applicable to the taxable base—that is, the value of the gift. The rate ranges from 7.65% to 34%, depending on the taxable base itself.

Once applied, the tax liability is calculated by applying a multiplier coefficient that depends on the group to which the recipient of the gift belongs (determined based on age and degree of kinship) and that can range from 1 to 2.4%.

However, the final amount will vary significantly depending on the tax credits and deductions applied by each autonomous community; in Madrid, for example, this can be as high as 100%.

To qualify for Madrid’s tax breaks, the document must be executed before a notary, and the source of the funds must be verified if the donation is made in cash.

However, for these funds to reach 100% (provided they do not exceed €250,000), the funds must be used to purchase the home within one year (although they could also be used to purchase shares and equity interests or to acquire goods, services, and rights for the development of a sole proprietorship or professional business operated by the recipient, with the same tax benefits).

As with loans between family members, the deadline for paying the tax to the tax authorities is 30 business days from the date the loan agreement is signed.

Andalusia, Cantabria, Aragon, Galicia, and Murcia share with Madrid the most generous tax breaks for donations. Meanwhile, in regions such as La Rioja, Castile-La Mancha, Catalonia, and the Balearic Islands, tax breaks are subject to factors such as the relationship between the parties or the amount of the donation itself.