Helping with home ownership
Use your nest egg to feather theirs.
Given the price of housing in the Lower Mainland and other parts of BC, it's extremely difficult for young people these days to purchase a home. As parents, you want to give them a helping hand if you can. It's important, however, to be aware of your options in how you go about it. There are a number of issues to be considered that could have an impact on both your financial situation and your child's.
The first question you should ask yourself is can you truly afford it? Before you commit to helping your child, review your plans with an advisor and be sure you have enough for your retirement. You don't want to find yourself in a position of helping your child now, only to become a burden in later years. If you decide to go ahead, here are four options.
Option 1: You "gift" them money.
For a condominium or other type of property that you have the funds to buy outright, you might want to consider giving your child the cash, rather than purchasing it in your name. If the amount was something you were considering leaving in your will anyway, it will save them from paying probate fees later. You could also give them a smaller amount which could cover all or part of the down payment. In BC, there is no tax on cash gifts of any size.
The key is to ensure the home is in their name so that, as a principle residence, it won’t trigger capital gains taxes when they sell. If the property is in your name, it would be considered a secondary residence and you'd get hit with the capital gains.
There is a significant downside to this approach. If there is a divorce, equalization laws mean the equity in the home would be split evenly between the two parties, regardless of where the money came from. A marriage contract could possibly offer some protection. If this is a concern, get legal counsel.
Option 2: You buy. They rent.
You can purchase the property in your name. The downside is capital gains when it's sold. The upside is because it's in your name, it won't factor into divorce settlements. You could also have them pay the monthly mortgage.
If you’re thinking about giving them the house later, be careful. The government considers it to be a sale at fair market value and you'll have to pay tax on the capital gains.
Option 3: You loan. They own.
If you loan your child the money for all or part of the downpayment or purchase, set the loan up so your child pays you back through a normal amortization schedule. You could charge an interest rate that is equivalent to what you'd earn in a savings account but less than your child would pay at normal mortgage rates, so you both benefit. However, keep in mind that any interest your child pays you is taxable income. The alternative is to loan the money interest-free.
If you co-sign the mortgage, your name will be on the property title, which means you’re on the hook if anything goes wrong or your child defaults. If you already have a mortgage, you're disqualified from a high-ratio mortgage and would be responsible for the full 20% down payment.
Providing assistance through a loan could provide better protection in a divorce; however, this area is complex and requires legal counsel.
Option 4: You "trust" them.
Setting up a discretionary family trust may be a viable option to help your child purchase a property. Since you're the trustee, you'll retain legal control. Your child would have to list the home as a principle residence during the years the trust owns it. This option is more complex and there are significant setup costs, but it does provide some options on designating proceeds when it comes time to sell.