Buying your kids a home – good idea or bad?
Owning your home has long been considered the Australian dream, but the changing property market is helping to ensure that it remains just that for many young people. Even with the introduction of initiatives such as the First Home Owner Grant and First Home Saver Accounts, housing ownership remains unaffordable to many.
Research by the International Monetary Fund shows that Australia’s property prices have rebounded since the dark days of 2008 by a staggering 25%. Furthermore, it reports that Australia has the third highest house price-to-income ratio in the world. It is due to this lack of affordability that many younger prospective home buyers are asking their parents for assistance in fulfilling their home ownership dreams.
Whilst parents who buy a house for their children do so with the best of intentions, there are hazards that may befall the unwary. These include:
- Tax consequences – how the property will be treated for tax purposes depends on whether rent is charged. If the child pays rent, expenses will be tax-deductible, but capital gains tax will be payable if the property is sold.
- Opportunity cost – many parents may not be doing themselves any favours if their own financial well-being and security is compromised by their generosity. Relying on retirement savings to purchase a property later in life could be a decision later regretted.
- Government benefits – if the property is owned by the parents, both the asset and any income will be included when calculating eligibility for Centrelink entitlements. Alternatively, should the property be placed in the name of the child, it will be considered a gift, meaning that the amount over the gifting limit will be deemed for up to five years. This can affect the level of benefits the parents might receive.
It’s not all doom and gloom though. There are ways for parents to assist their children enter the property market that can also help to deliver valuable life lessons. These include:
- Gifting a deposit – instead of buying the whole property, gifting the deposit can often be sufficient to help offspring obtain finance, with the child taking responsibility for loan repayments. Furthermore, this option can address Centrelink concerns, and lessen the impact on the parents’ financial security.
- Acting as guarantor on a loan – this involves using the parents’ assets as security for all or part of their child’s home loan.
- Buying the property together – this arrangement generally involves parents providing a deposit, with the ongoing costs of the property being split between the parents and the child.
Put it in writing
There is a range of legal issues to be considered before entering into these arrangements. The rights and responsibilities of each party should be clearly and formally documented and address key decisions. These include, but are not limited to,
- who is responsible for ongoing maintenance and costs on the property;
- what to do if either party wishes to terminate the arrangement;
- what happens if the child cannot meet repayments;
- how the property will be held when/if the child marries/divorces; and
- what happens to the property when the parents pass away.
Helping out your kids might seem like a good idea, but it is important that professional advice is sought first. Your financial adviser can help you to explore the available options to ensure that you find the solution that best suits your family’s circumstances.