Parents often ask me how they can help their children into property.
Some even contemplate giving one of their existing properties to their children.
For those more financially free, giving a property while they are still alive so they can see the joy it creates can be very heart-warming.
But there are a number of reasons why you should beware.
Firstly, the tax department will have its hand out for its share.
The market value is used to calculate the taxes and you can’t simply say “zero” or as “a gift” to reduce the taxes.
For many, it would be nice to buy or transfer a property to your children but the difficulty is how to achieve it without taxes.
The other consideration is that on death a will can be contested so the right people may not end up getting what you wanted.
Let’s look at three strategies to achieve the desired outcome of helping your children into property.
1. Deposit gift
You’ve probably heard about the Bank of Mum and Dad.
More and more parents are gifting their adult children enough funds to cover a part or all of the deposit to buy a property and then their children remain responsible for the bank loan.
However, you may have to gift additional funds if the bank will not lend the full difference.
The property in these circumstances is owned by your child and is subject to all the normal issues with asset protection or any family law court disputes with their life partner.
To help elevate these two issues, you could loan the funds rather than gift it.
That way in the event of bankruptcy or family breakdown you could recoup your loan.
However, this requires careful consideration as a bank will now judge the serviceability and risk based on two loans and may see this as too risky.
Some clients support their children by guaranteeing a higher loan and so do not actually pass over any funds.
However, you have to be very careful as in the event of a default you would be liable for the full loan and could lose any security you may have given, such as your family home.
Try and limit any guarantee to the minimum amount required and when the property grows in value sufficiently arrange for a refinance so that you can be removed as a guarantor.
2. Buying for a minor
For minor children (under 18 years of age) you can purchase a property in their name with the proper notations on title.
Yes, a minor child can own a property.
As their legal personal representative, you will have the responsibility of managing the property.
When your child reaches the age of 18, you will need to take a copy of the birth certificate and evidence that the child is still alive to the relevant government department who will then make the necessary title changes.
Please note that any income from rent or capital gains on a sale will attract the punitive minors tax until they reach the age of 18.
Minors tax is applied to income not earned by actual working i.e. a paper run.
The rate is 66 per cent on amounts over $416, sliding down to 45 per cent on amounts over $1307.
You will also need to consider tax deductibility of the interest expense on the debt.
For deductibility, the debt will need to be in the minor child’s name and the property obviously used as an investment.
Property purchases under this strategy will require a court approval to be sold prior to the child reaching 18.
This will be both costly and may be difficult to achieve.
Before we get to the third option, let’s review the first two.
While they are legal, they may not be in your best interests and what was once a good idea may soon not be with children going on a spending spree, relationship breakdown or just abandoning their loving parents.
So, is there a better way?
3. Using a trust
This takes us to the third strategy, which is the use of a trust.
In this strategy, a family trust is used to purchase the property and you as parents will be the trustee of the trust.
If you had a high deposit the property may in fact be cash flow positive.
For people in business the variations are numerous and you can even have a negatively geared property in the family trust and get the tax benefit if operating out of an appropriate business structure.
When the time is right, if ever, you can pass control of the trust over to your adult child.
Even after you pass over control, you can still retain a level of control but let your child borrow against the property for further investments or you can decide to let go completely.
There are certain mechanisms you can keep in place to safeguard the property from your child’s potential spending spree or their family breakdown so there is a lot of flexibility in this strategy.
Another benefit of seeing a good property specialist with tax experience is that the correct trust can be set up and as such it can be handed down from generation to generation.
It is possible to set up a trust structure that does not end and has a lineage safety net that protects the assets so they remain in the direct lineage of the original beneficiaries i.e. you.
This protects against the in-laws – not that there is anything wrong with in-laws of course.
OK, your child does not own a property in their personal name, but they control it through the family trust.
And that means they have achieved asset protection, a family breakdown safety net, improved estate planning and they can leverage this into more assets, having achieved what is hopefully a significant capital gain (untaxed as not sold) over a long period of time.
If at some future point they decide to use the property as a home and stop using it as a rental there are strategies that will preserve a level of free capital gains tax even though the property is in a trust.
Helping your children into property is the dream of every parent, but you have to set up the right structures at the start to ensure your gift is one that keeps on giving.
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