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Many of our clients want to assist their children in entering the real estate market. In major cities, it can be difficult to save for a deposit and service debt.
Often, parents assist by way of a gift to increase the deposit. They may also be asked to guarantee the loan and take on the risks.
I’ve been working with clients recently who want to find a new way to help children. The goal is to get their children into the real estate business in the long term. Their main concern for the short term is to make sure that their children are able to transition from living at home to becoming independent adults.
Many children around the world leave home to go to university and start an independent life. This is not true for the majority of people in Australia. The parents I work with are keen to help their children make the transition from dependency to independence.
Parents could pay rent to their children so they can attend university. However, our clients are thinking about using the money to pay off an asset. This is a situation where they can make it work.
The podcast will discuss some of the findings.
I want to start by clarifying the transaction. I have simplified and changed certain facts to protect your privacy because of our limited podcast time.
Their child will only be paying a small amount of rent while still in school. Once they start their career, this rent is likely to increase.
The older children will use the house until they reach university, then the younger ones can use it.
Both children are expected to use the property in some capacity after they no longer require it.
Ownership Options
This situation has three ownership options.
- Parents can purchase property in their name
- The title to the property includes both the parents and children
- A property is purchased within a trust.
You should always seek advice tailored to your specific circumstances before making any significant financial decisions. Before making any major financial decisions, you should seek out advice that is tailored to your circumstances.
Option 1 – The parents can purchase the property themselves
The parents have complete control. Parents don’t ask their children to provide financial information or sign anything to fill out a loan application. The parents can sell the property themselves if it is later sold.
The simplicity of ownership can be a great asset.
It is also easier to avoid family conflicts. I have seen this happen with friends of mine after their parents shared a home. The siblings were not able to agree on what to do about the house because they had different goals.
The parents can make better use of the negative gearing.
You should not buy property in your name.
Option 2: The property title will be registered under the name of both parents and children.
You need first to consider your child’s age. Minors may find it difficult to deal with this situation.
Let’s say all of the children are older than 18. Getting them on the title gives them a sense of ownership and responsibility, as well as a reason to feel optimistic about their long-term ability to keep a roof above their heads.
If the child is in their early career and has a lower income, then they will pay less capital gains taxes.
This option has many disadvantages, which are the opposite of those of Option 1. For example, all owners must agree to any changes to the property, which could lead to delays or headaches, especially if a child decides to move abroad or to another state.
Option 3. The property is purchased within a trust
In this situation, a trust for the family will be created. In this case, a family trust will be established.
The advantage of this approach is that the parents will retain control at first. You can transfer power to the children without having to pay stamp duty or capital gain assessment. When the children sell the home, they must pay capital gains tax.
This is an excellent solution for those who are having problems with the other two options. But there are some downsides. For example, you will have to pay the fees to set up the trust as well as the tax returns each year. You will have to pay additional accounting fees.
Consider using a trust to help parents purchase a home for their children. Be sure that you can justify the additional costs of this extra complexity.
