Stepping Stone: Navigating the Property Market as a Parent-Child Team

Our clients often want to help their children enter the real estate market. We all know, especially in the major capitals, that it is difficult to save a deposit or service debt.

Most often, parents will assist in the form of a gift or a lump-sum sum to boost the deposit. Parents may be asked to guarantee a loan with the associated risks.

Recently, I have been working with clients who are looking for a different way to help their children. They do, in the medium term, want to help their children get into the real estate market. In the short term, their main priority is to help them make the transition from the family home into an independent adult.

Around the world, many children leave their family home to attend university and begin an independent life. In Australia, this is not the case for most people. Parents I work with believe that a transition from dependence to independence would benefit both their children and are eager to facilitate it.

The parents could subsidize rent so their children can attend university. Our clients, however, are considering using the rent money instead to pay off an asset. They’re in a position to make this work.

This property will be used in the future to help them buy a home. The property will likely be sold, and profits will be divided between them. How should we structure the situation now? Should parents buy property under their names? Should the children’s names be included on the property as well? Perhaps a trust would be useful in this situation. In this podcast, I will share with you some of our findings.

To begin, I would like to clarify the transaction in question. In order to protect your privacy and also because we have limited time for a podcast, I have changed and simplified certain facts.

We want to buy a property in the next six months, preferably an apartment. The couple’s oldest child could live in the house, possibly with a roommate who would pay rent. While still in university, their child would only pay a minimal amount of rent. This rent would likely increase as soon as they begin their career.

The older child will continue to use the house for three to four years, and then the younger child can use it while they are in university.

Both children are expected to use the property in some capacity when they no longer need it.

Ownership Options

Three ownership options are relevant to this situation.

1. Parents purchase the property on their behalf
2. The title of the property includes the names of the children and parents
3. The property is bought within a trust.

Consider the pros and cons for each. These pros and cons were based on research and my professional experience. There’s a good chance that tax lawyers and legal advisors could have more to say. Please remember that the information in this podcast is only general. You should always seek advice tailored to your specific circumstances before making significant financial decisions.

Option 1: The parents can purchase the property on their behalf

This approach is a simple one. Parents have full control. They don’t require their children to sign anything or provide any financial information to complete the loan application. If the property is sold later, the parents can easily handle the sale between them.

It is also easier to change the strategy if circumstances change. Maybe one of the children has an addiction or a partner that is a financial drain. They may end up attending a university located in a city or country other than the one they originally planned to. Change is said to be the only constant. In this context, the simplicity of ownership is a valuable asset.

The simplicity of the process also reduces the likelihood of family conflict. With friends of mine, I’ve seen siblings become estranged after their parents gave them a house to share, with the best intentions. However, the siblings had different goals and views and were unable to reach a consensus about what to do with the house. If the parents had owned the property, they could have split the proceeds, and the adult children could do their own thing.

In this particular case, it is most likely that owning the property only in the name of the parents will result in the best possible outcome in terms of negative gearing. The parent’s income will likely be higher than their children’s for some time. Parents can, therefore, make better use of negative gearing.

These are the reasons why you should only buy in your parents’ name. We have identified a downside to this method. The property will be used to assist the children in entering the real estate market on their own. This is most likely achieved by splitting the proceeds from the sale of the property. If the parents own the property, they will be responsible for all capital gains taxes that arise upon purchase.

Option 2: The property title is registered in both the names of the parents and children.

First, you need to consider the age of your children. Are they minors or adults? This option is definitely viable if they are adults. If they are under 18, this could prove to be a challenge on many fronts. A minor involved in a loan for a property is likely to be a problem with the bank. If they are listed on the title, they will need to approve the use of that property as collateral for the loan. This is difficult for a minor. The punitive tax on minors will complicate the situation further.

Let’s say that all the children are over 18. It’s good to get them on the title because it gives them a sense of ownership and responsibility sense, as well as a reason to be optimistic about their ability to secure a roof over their heads in the long run.

This means that if the children are in their early career and have lower incomes, they should pay less capital gains tax.

This approach has many disadvantages that are the opposite of those mentioned in Option 1. All owners, including parents and children, must agree on anything that happens with the property. All formal documents, such as loan applications and contracts of sale, will have to be signed by everyone and include their details. It could cause delays and headaches if one of the children decides that they want to live abroad for a while or even in another state. The future, and especially a possible divorce, can also be challenging.

Option 3: The property is bought within a trust

In this case, a family trust will be established. The parents control the trust through a corporate trustee. The trust could have all family members as beneficiaries. The parents will eventually hand over the control of the trust company to their children.

This approach has the advantage that, at first, parents retain full control. There is a way to transfer the power to your children without triggering a stamp duty or capital gains assessment. If the children decide to sell the house, a capital gain tax will be due.

The trust structure is a good solution to the problems that the two previous options presented. However, there are some drawbacks. You have to pay for the costs of establishing the trust and the annual tax returns that the trust needs. This will incur additional accounting fees. This makes the transaction more complicated. The loan application will likely be more complex, and the interest rate will probably be higher than it would be if the loan were in your name. ATO has also been cracking down on families who use family trusts to minimize their unfair taxes. It’s possible to open yourself up to scrutiny by the tax office if you choose this route.

It is worth considering the use of a trust in order to help parents buy a home for their children. Just make sure you are satisfied that the extra costs incurred by this additional complexity will be worthwhile.