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THE BEST WAY TO HELP YOUR CHILD BUY A HOME.

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While it is perfectly understandable that a parent would want to give their child money to assist with the purchase of a new home, it might come as a surprise to learn this is not always the wisest course of action. Bongiorno & Partners (NSW) encourages parents to consider four different options. Please note that all the below scenarios assume the child lives in the home.

OPTION 1 – SHARED OWNERSHIP – PARENT AND CHILD

A parent is co-owner with the child when buying a home. The parent’s ownership share is represented by the contribution of funds to the child’s home. This may be 20% of purchase price as the deposit. The child then secures a home loan to fund the other 80% of the purchase price of the home. In this scenario:

  • No land tax is payable by parent or child.

  • No CGT for the child. Parents subject to CGT on sale of the child’s home.

  • Parent and child proportionally benefit in capital growth.

Important: any transfer of title on a shared ownership agreement will be subject to Stamp Duty and would involve a capital gains tax assessment.

OPTION 2 – GIFT FROM PARENT

Parent ‘gifts’ funds to help the child buy the home. The child is a 100% owner of the property.

  • No land tax payable by child.

  • No CGT for the child on sale of the child’s home.

  • No capital growth for parent. The child benefits from all the capital growth.

Important: in the event of the child’s business failure or de facto/marital breakdown, the gifted capital would be part of a bankruptcy or family law settlement.

OPTION 3 – LOAN FROM PARENT

Parent lends funds to help the child buy the home. The child is the 100% owner of the property.

  • No land tax payable by child.

  • No CGT for the child on sale of the child’s home.

  • No capital growth for parent. The child benefits from all the capital growth.

Important: in the event of the child’s business failure or de facto/marital breakdown, the loaned capital can be repaid under the loan agreement through the sale of the property. Later, the parent may enter into a new loan agreement of new capital to help the child buy a replacement property.

OPTION 4 – PARENT OWNERSHIP

Parent buys the property in their name. The child pays market rent as the tenant.

  • Parent is subject to land tax each year.

  • CGT on sale of the child’s home for the parents.

  • All capital growth to parent.

Important: child must pay market-rate rent for the parent to claim any property overheads. If property passes to child under the parents’ deceased estate, the child inherits the parents’ cost base and no CGT is payable until the property is sold. Also, no Stamp Duty is paid on transfer of the property through the deceased estate.

If you would like to know more about the best way to set your child up for life without incurring unexpected taxes or putting your family’s wealth at risk, please feel free to arrange a meeting with the team.

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