All in the family: Parental strategies in a red-hot housing market
Posted on 08-13-2014 10:08
Summary: In Canada's extremely expensive real estate sector, maybe what adult children need is a sweetheart deal from Mom and Dad
Where there's a will, there's a way for parents to help their adult children buy a house.
That's will as in last will and testament. In the kind of extremely expensive real estate market we have in many cities, maybe what your adult children need is a sweetheart deal from Mom and Dad. Maybe pass the house down in your will, or sell it at a bargain price to a son or daughter.
Graham Williams, partner at the accounting firm Stern Cohen, doesn't think much of this latter idea. "We can't remember a case where we recommended a client sell their home to their adult children," he wrote in e-mail. "We hate to disappoint the many millennials out there who are currently priced out of the housing market, but from an accountant's perspective it might not be a financially sound solution."
One of Mr. Williams's objections is that you're wasting the biggest opportunity of your lifetime to make a big investing gain tax-free. A house, as long as it's a principal residence, can be sold without having to pay tax. This is an especially important detail if your home has doubled or tripled in value in the decades you've owned it.
Another objection from Mr. Williams is that parents often need to maximize the proceeds from selling their home in order to downsize to a condo and perhaps have some money left over. One further objection is the family dissension that can be created when parents offer a sweetheart deal on the family home to one child and not others.
But, if you were so inclined, is it possible to help an adult child deke around high house prices by selling her the family home at a below-market price? Mr. Williams said the answer is yes, while offering up an alternative: Sell the house on the open market, downsize and then use some of the leftover money (if any) as a gift to the children. "There's no gifting tax in Canada, so you can give cash to your kids - as much as you want," he said in an interview.
Alternatively, if you do help your kids with a down payment for a house, consider designating the money as an interest-free mortgage that must be repaid when the home is sold (you can always forgive the loan if you want). Mr. Williams suggests consulting a family lawyer on this. The goal is that your gift won't be considered matrimonial property if your adult child divorces his or her spouse.
This measure also gives parents some control if their adult kids unwisely sell their house to move up to something more expensive. "Basically, it means that if they sell the house, your kids have to pay you back the money you gave them," Mr. Williams said.
Another thought: Pass your house down to your adult children in your will. Mr. Williams said a house would be considered as sold at fair market value on the death of the owner if willed to children directly or as beneficiaries of the estate. Even so, a home that is a principal residence would be exempt from tax in this situation.
Probate fees - they're charged by provincial governments and cover the cost of validating a will - are likely to be triggered when including a home in a will, said Lucinda Main, a trust and real estate lawyer with Beard Winter LLP. Probate fees are nominal in some provinces, but Ms. Main said in Ontario they would amount to $7,000 on a $500,000 house.
This explains probate-avoidance manoeuvres such as adding an adult child's name on the title of a home. Ms. Main said an arrangement called joint ownership with right of survivorship is commonly used with spouses so that if one partner dies, the house automatically transfers to the other without probate. In turn, the surviving spouse might put her daughter jointly on title. The goal: A seamless transfer of the house to the daughter on the parent's death, with no probate fees charged on the value of the house.
Ms. Main said she's not a huge fan of parents and adult children owning a home jointly because of the potential complications. If parents want to sell or mortgage the house, they need the consent of their children. Also, the house could get caught in bankruptcy proceedings or a marriage breakup involving the children.
Adding one child on the title of your house presents fairness issues as well, Ms. Main said. "If you have one child on the title of a property, how do you deal with the other children? Do you try and equalize things in the will?"
Finding a way to transfer a house from parents to adult children is tricky for sure. But then, so is affording a home in today's extremely expensive market.