I know that money isn’t everything. But it sure does keep me in touch with my kids. I’m not just “Dad” around the house. I’m the “Bank of Dad.” Regardless of how old your kids are, there’s a good chance they may need a leg up – or a handout – at some point in time.
I’m thinking particularly of young people living in Toronto, Vancouver and a growing number of smaller communities around the country where housing prices have risen significantly. How can a young person possibly afford to buy a home nowadays? It can take many years, even decades, for a young person to save enough for a down payment (check out The Globe and Mail’s down-payment calculator online at http://tgam.ca/EP4W).
I’ve had an increasing number of parents contact me in the past few months asking about the best way to help a child buy a home. Here are some ideas to consider.
1. Make it a starter home.
If you’re going to help a child buy a home, make sure he or she can afford the property taxes, maintenance, mortgage payments and other costs on the place – otherwise you could be writing more cheques later. There’s no point in helping your child buy a home that his or her income can’t support. Even a smaller starter home can get your child into the market and, over the long run, help build equity that could lead to a different place later.
2. Consider a gift to help your child.
If you make a gift of cash to your child to help buy a home there are no negative tax consequences – unless you have to sell some investments at a profit to free up the cash, in which case taxes could be owing on a capital gain.
If your adult child buys a home in her name and lives in the place, then she’ll be able to use her principal residence exemption (PRE) later to shelter any gains from tax. Be aware that if your child is married and then later divorces, the value of your gift could be split between her and her ex-spouse if those dollars were invested in a matrimonial home. Making a gift to your child before she gets married may mean she’s entitled to that value (i.e. it may not have to be split) upon a marriage breakdown – but speak to a family lawyer in your province to confirm the rules where you live.
One last point about gifts: If you’re a U.S. citizen, making a gift to a child can trigger a gift tax liability if the gift is more than $14,000 (U.S.), the 2016 exclusion amount, although you’ll likely be able to avoid any tax hit by using up part of your estate and gift tax exemption (speak to a tax pro).
3. Consider a loan to help your child.
Lending money to your adult child to buy a home might be an even better option. There are no negative tax consequences to lending money for the purpose of buying a home. You’ll maintain some control over the property if you set it up as a mortgage on the home. The mortgage can be interest-bearing, or not, with specified repayment terms, or simply due upon demand.
If your child goes through a divorce, you’ll be entitled to take back the balance of the mortgage outstanding, which can help keep those dollars in your family rather than handing part of that amount to your child’s ex-spouse.
The loan you make does remain an asset of yours, which could be subject to probate fees upon your death in provinces in which those fees are levied (likely to be a small cost on a mortgage loan to your child). As for U.S. citizens, lending money to buy a home will avoid any gift tax issue.
4. Consider gifting the property itself.
One parent told me he wanted to gift a rental property to his daughter for her to own and live in. Transferring a property will be taxed as a disposition at fair market value (FMV) by you. This may be fine if the property hasn’t appreciated in value much, or you can shelter any capital gain using your PRE (which was not possible in the case of this father because he was transferring a rental property). In this case, his daughter will inherit the property with an adjusted cost base equal to the FMV at the time of the transfer, and she should be able to use her own PRE to shelter any gains going forward if she sells.
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