With the cost of housing climbing, many parents may wish to help their kids get into the market. If you’re considering selling your house at a discount, you may want to pause and think that through. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to explain why.
* With the price of housing continuing to go up, many parents are trying to find ways to help their kids get into the housing market. Here to answer a question on that on today's "Ask MoneyTalk," Nicole Ewing, Director of Tax and Estate Planning joins us now. Nicole, here's the question. I want to sell my house to my child at a discount. Is that a good or bad idea?
* Well, from a tax perspective, it's a nightmare. Because generally speaking, if I sell a property to a non-arm's-length person, so to a close family member, like my kids, I will be deemed to have sold it for fair market value regardless of what I actually sold it at. And so from a tax perspective, that means if there's a tax bill due, it's on the fair market value not on the amount that I actually received from my child. They, unfortunately, don't get the same treatment from tax perspective. So even though I've paid tax on the fair market value, my child's new cost base would be whatever they actually paid.
* And so if we run through an example, if, for example, the house is currently worth $1 million, I sell it to my children for $500,000, I'm still going to be taxed on that sale at $1 million. Their new cost base will just be $500,000, meaning if they were to turn around and sell it a year from now, they're going to pay tax on that same $500,000 gain up to $1 million that I've already paid. So from a tax perspective, we're potentially in a situation where we're both paying tax on the same amount.
* Now if it's my principal residence, then I might be able to use my principal residence exemption. I don't need to pay tax. If they're doing the same thing, they don't need to pay tax. So in that situation, it might be it might be all right. But really, we would want to think about here, is it better to just sell to a stranger for fair market value and gift those amounts to my children to buy a house of their choosing? Or do I sell it to them for the fair market value, and instead receive that money over up to five years, and they can pay me over that period of time and I only need to realize the gain each year as we go, so potentially reducing the overall tax rate?
* OK. Well, let's-- you got into a couple of alternatives at the end there. By the way, it is a good idea to do what that person asks, just not for you or your children but for the government. They get more tax for them. So maybe that's who it's good for.
* Let's talk about maybe gifting money for buying a home. Why is that easier? You kind of alluded to the fact, that is less stressful, might make more sense.
* It is. Because if we're just gifting or we're lending cash, then we don't have any tax considerations to think about. So that's certainly an easier way of going about doing things. It's also easier if we want to equalize with other children. So they might want to be buying a home as well. And then we have two children who potentially want the same property. So cash will likely be an easier result there.
* And ultimately, it allows your children to choose a home that best suits their needs. So they are not bound by the property that you chose perhaps many years ago, but they're able to choose something that might be most suitable for them.
* That's a really good point. What about a loan? What about loaning your kids the money?
* So loans can be very effective in depending on what we're trying to achieve here, but from a creditor perspective or perhaps even a family law perspective, this might be a best alternative. So that if unfortunately, there was a breakdown in your child's relationship, you're able to call back that loan and get the proceeds back into your hands so you're not inadvertently gifting those to your child's spouse.
* So certainly, a loan allows you to set the terms of that loan. You might have some interest to include in your filings, but loans can be very effective. But you'd want to make sure that the terms had been thought out, whether or not you're making that loan to your child themselves or to their spouse. You'd probably want to get some legal advice on that. So as with most things, my recommendation would be to seek out professional help, walk through the options, and see what works best for you in your particular circumstances.
* Nicole, thanks very much. Great answer. And just a reminder to everybody, if you'd like to Ask MoneyTalk a question, you can send us an email to email@example.com.