Family real estate transactions stereotypically involved one of the kids inheriting the house when Mom or Dad died. Today, it more often involves parents financially assisting their children with buying a home, though there are several ways this can be done.
According to a Canada Mortgage and Housing Corporation survey, almost one in five first time home buyers received help from a family member. Parents cannot take money out of an RRSP to buy a home for their children, but they can take out money to lend to their children, though this could create tax issues if the loan isn’t repaid in time. The CREA is proposing that parents should be able to dip into their retirements savings tax-free to fund a property down-payment for their children. Others simply gift their children money. This has the benefit of being simple and straightforward, provided parents have the cash. There are no tax implications unless you sell investments to raise the cash. However, if the value of the gift is up for grabs if you child gets divorced and the equity in the home is divided among them. If you give the cash to them before the marriage, the money may not need to be split during a divorce, but consult with an attorney before assuming that’s the case.
If you borrow against your own home to give your children cash, you still have to pay the interest on your mortgage. If you borrow against your home to give them a loan, now you have two loans to manage. Another practice is the literal Bank of Mom and Dad, where parents loan the money to their children for a home. The child makes payments to the parents instead of a bank. There are no negative tax consequences for doing this unless you forgive the loan. The mortgage could be interest-bearing or not. The payments could be low or high, and they could be set up to be flexible like a minimum $500 a month payment but no prepayment penalty. Or the mortgage could be due on demand; in this case, the adult children could live rent free until they can secure their own mortgage and pay off the loan to their parents. The parents retain control of the property because they own it. If your adult child goes through a divorce, you can take back the outstanding balance of the mortgage. However, the loan is considered an asset of the parents that could be subject to probate and associated fees upon the parents’ death.
A very few buy the home outright for their children, though there are legal and financial implications for transferring the ownership. Capital gains taxes are just the start of the headaches, and that’s aside from parents owning a share of the property that is at risk when there is a lawsuit or divorce.
No wonder so many take the easy route out and ask their parents to be cosigners on the mortgage instead. However, you should consult with a Red Deer Mortgage Broker to learn what all of your options are, since you could find an affordable mortgage in your own name. And there’s the added benefit of never having family money fights because you didn’t make a payment to your parents or they had to make a mortgage payment because you fell behind, dinging their credit as a result.
The CREA proposed other changes to borrowing against one’s RRSP. For example, they asked if the maximum amount first time buyers could borrow against the RRSP could be increased by $10,000. This simply reflects today’s higher home prices. It also suggested expanding the home buyers’ plan to include costs associated with accommodating an elderly family member. This could mean letting someone borrow against an RRSP to build a detached mother-in-law suite or renovate a basement to put in a mortgage helper in a home they already own. While it isn’t yet approved, this situation could open the door to parents and adult children borrowing against their RRSPs to build a mortgage helper add-on to the home or stand-alone secondary home.
It is possible for groups of people to buy property as investors, whether they’re friends or relatives. However, you should consult with an attorney to minimize the risk that everyone has to move or the house has to be sold because one party’s share had to be liquidated due to death, divorce or a legal judgement. While a young adult may ask parents to loan money so they can buy property with other people, this is generally unwise unless they’re married due to the weaker legal protections afforded when she buys a house with her boyfriend before they split up.
In December, the Globe and Mail published an article about parents buying homes in the names of their school aged children before renting the properties out. Parents saw it as an investment, a way to guarantee their children could live in the community they grew up in. Parents had the luxury of putting down deposits on condos two and three years from completion because it had no impact on their credit. They could buy pre-sales, secure a mortgage and make payments until the day years hence when their children could take over the property. The capital gains taxes might be steep (and due on the appreciated value of the property) but not as high as if someone tried to buy a condo after another decade of double digit price increases. If all else fails, the properties could be sold to pay for the parents’ retirement or cash given to the child to buy a property somewhere else. This isn’t something very many people can consider, but it can be treated as just another way to invest in real estate.
Parents who own rental property could consider transferring the property to their own children to become their personal residence. Consult with a tax professional to understand the implications and the associated tax bill. There are taxes and paperwork involved even if you give your primary home to your adult child and move into one of the rentals.