How To Buy Your Kids A House

Posted Friday, April 8th, 2011. Filed Under Financial Empowerment

This is a great article, written by Jonathan Chevreau in the National Post, I came across with some helpful tips.

When making this decision you need to be aware of the full tax and estate planning consequences.

There are at least 4 options according to chartered accountants Kathy Munro and Caryn Walt.

For purposes of explanation let’s use the example of $250,000 Condo:

Option 1: Buying the condo in your own name (parents) and having the child pay you rent. Assume the parents are in the top 46% tax bracket. But if they already have a principal residence for tax purposes, any capital gains on the second property – the one being rented by the child – will not be tax-free for the parent/owners.
** You and your spouse are considered one family unit, which gets only one principal residence. So if the condo rises in value to $450,000 at your death (or sale) the capital gains tax will be $46,000 (half the $200,000 gain x 46%). The condo will also be subject to probate fees as high as 1.5% in Ontario or 1.523% in Nova Scotia.

Option 2: Gifting cash of $250,000 to the child, who buys the condo in their own name. This has no immediate tax consequences but can create problems with siblings who may naturally desire an equal portion of the ultimate inheritance. Parents can consider being open and honest how their estate will be divided prior to their death. Tax-wise, though, this condo becomes the child’s principal residence, which means tax-free capital gains if it rises in value over the years. And because the parents don’t own it, there will be no probate fees upon their death. The downside comes if the child gets married and then divorces. Under equalization family law, he or she may lose the half the value of the condo to the departing spouse – whether the departing spouse is your child or not.

Option 3: Set up a mortgage so the child buys the home and pays you back through an annual amortization process. The loan is interest-free because any interest paid by the child is taxable in your hands and the child can’t deduct the interest on his or her own tax returns. The child can pay back the principal or the mortgage can be left outstanding, providing better protection if a divorce occurs while owning the condo. There may be probate fees but as with Option 2, the child takes advantage of the principal residence exemption. This is the most popular option.

Option 4: Creating a discretionary intervivos family trust to acquire the condo on behalf of the child. Since parents act as trustees, they retain legal control over properties set aside for their beneficiaries: the children. The child cannot designate another property as a principal residence during the years the trust owns the condo. This option is more complex and costs a few thousand dollars to set up but provides more flexibility for the changing needs of the child -the beneficiary who ultimately receives the condo or the proceeds from its sale can be determined by trustees in the future.

Jamie Golombek, managing director, tax, with CIBC Private Wealth Management, favours a zero-interest mortgage, which is “easy, tax-effective and guarantees mom and dad can get their money back should they wish.”
Alternatively, you could waive principal repayments during the course of the mortgage; ultimately, the parents forgive the debt entirely, essentially gifting the loaned funds to the child.

These are some options to consider when your child is buying a house especially if you want to contribute to the home purchase in some way. Be aware of all the tax advantages so that you can give according to what makes the most sense for you! While we all go into a marriage hoping that it will last forever, the likelihood is that a large percentage will end up in divorce. To protect your child and the money you must consider what options makes the most sense for you.

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