10 Strategies to Your Help Children Get into Property

Discussion in 'Investment Strategy' started by Terry_w, 20th May, 2017.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    10 Strategies to Your Help Children Get into Property


    Here in this post I am referring to adult children. There are a number of ways that parents can help adult children purchase property and these are outlined below.


    1. Lead by example and encourage the *******s to follow you.
    Some parents want to make the kids stand on their own feet without any monetary help. You could help them in an advisory capacity however.


    2. Lend them the deposit
    A child may have enough income to service a loan, but not enough money to qualify for the deposit. Generally 15% of purchase price is needed these days with 10% for the deposit and 5% for costs.


    To avoid LMI – both the cost and the stricter criteria – the parent may want to lend them the 25%.


    3. Parental Security Guarantees
    Instead of lending the deposit the parent could allow their property to be used as security so that the child could borrow up to 105% (or more possibly) for the property.


    4. Lend them the full purchase price
    Young adult children may lack the financial capacity to borrow enough to purchase the property and/or their employment situation may mean they cannot obtain finance.


    The parents could borrow against other property and on-lend to the child to purchase or the parents could use their own cash.

    Interest at market rates could be charged for the loan, or perhaps no interest – depending on the circumstances.


    5. Go on title as joint owner
    But keep in mind the tax effects when the property is sold.

    In Gerbic v FC of T [2013] AATA 664 a parent found out the hard way that when the property was sold it was not exempt from capital gains tax because dad had never lived there and was claiming his other property as his main residence. Dad unsuccessfully argued that as it was the son’s main residence his share of the gain was also exempt. This failed and he argued in the alternative that he was acting as trustee for the son, however this failed as well as there was no proof of the trust relationship.


    If the parent does choose to go on title consider whether it should be as tenants in common or Joint tenants. If tenants in common then equal shares or unequal should be considered. There are arguments for each, but if the child is going to live in the property then tenants in common in the shares of 99/1 or 90/10 will result in less CGT where the parent is the 1 or 10% owner.


    See Gerbic v FC of T [2013] AATA 664 BarNet Jade - Find recent Australian legal decisions, judgments, case summaries for legal professionals (Judgments And Decisions Enhanced)


    6. Employ them in your business
    For someone to qualify for a bank loan they will need a job. The parent may be able to help out in this regard by having a company they control employ their child. The lender may look at this closely where the company is owned by the parents and one or both are directors, but this can help with getting finance.


    7. Act as trustee for them
    It is possible for a parent to buy a property in their own personal name as trustee for their child. Later when the child gets established the parent could transfer title to the child.

    Where done under a formal bare trust arrangement the child would be absolutely entitled to the property and its income and transfer could be done without triggering CGT or stamp duty (or nominal duty).

    See s 106-50 ITAA97 http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s106.50.html

    $50 stamp duty in NSW see s 57 Duties Act 1997 (NSW)

    http://www.austlii.edu.au/au/legis/nsw/consol_act/da199793/s57.html


    8. Gift the deposit
    Gifting the deposit is also possible. This can help qualify for servicing the loan as there would be no repayments associated with this amount whereas there would if the deposit was lent.


    In general I think it is better to lend the deposit rather than gift as more control can be maintained and this can assist in bankruptcy and family law disputes.


    9. Gift the full purchase price
    Instead of just gifting the deposit the generous parent could gift the whole purchase price.

    Generally not a good idea though. It would generally be better for an interest free loan to be made instead.



    10. Gift property
    Get rid of that low LVR property with high land tax by giving it to your child! This could be a good strategy, but again it might be better to make them an interest free loan and have them purchase the property from you.

    Gifting will result in both CGT and stamp duty being triggered at market rates.


    Note: Before doing any of the above seek the advice of a lawyer as there are many complex legal issues to consider involving family law, estate planning, trust law, asset protection etc etc.
     
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  2. spludgey

    spludgey Well-Known Member

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    Terrible strategies if you actually want your children to succeed in my opinion! This is teaching them that everything in life comes easily and this doesn't need to be valued, exactly the opposite of what should be taught to them.
    Even if I will be in a financial position to do so for my (currently minus 20 week old) child in the future, I'll make sure I don't do this. A hand up is much more useful than a handout in the long run.
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I didn't say they were good - just listed the possibilities and each person needs to make their own decisions.
     
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  4. WestOz

    WestOz Well-Known Member

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    I'd also add to this (relevant to myself atm);

    Whilst it can be bloody difficult, frustrating, try and instil in their "i know everything head" that their first home isn't necessarily going to be their "dream home", one that they have to be in forever etc. It might not be in their ideal house, location, close to family & friends etc, but initially just a stepping stone to build some equity to eventually have that.

    Taking advantage of FHOG on a basic cheap off the plan house & land package gets them into the market, hopefully builds some equity to move on to the next, and next if required, until achieving their considered "dream home/location". Have to start somewhere.

    My daughter, now married with one on the way, renting, wants her "dream home", meanwhile she's prepared to miss out on the extra (takes awhile to save) 5k FHOG (15k in total) WA state gov will retract back to 10k from 1st July.
     
  5. zlatan9

    zlatan9 Well-Known Member

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    sadly, for the most part I see many adult children showing no interest, happily spending every cent (and a bit more) of what they earn, knowing that one day they'll be getting a windfall.
     
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  6. WestOz

    WestOz Well-Known Member

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    Might be in for a shock hey
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Just keep reminding them that you will be leaving everthing to charity. - Even draw up a fake will and leave it somewhere for them to stumble across.
     
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  8. kierank

    kierank Well-Known Member

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    I have only utilised these two and with great success. Both kids are in their early 30's and both have purchased two properties so far.

    The other eight have "too many hairs" on them for my liking :).
     
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  9. Marg4000

    Marg4000 Well-Known Member

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    #1 for me.

    Give kids a good education then let them stand on their own two feet. Worked for me, three kids (all in their 30s), each own at least one house, though we did lend one $3K in case expenses were higher than expected (promptly repaid).
    Marg
     
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  10. willair

    willair Well-Known Member Premium Member

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    Sounds like a good plan the fake will..
    But when you look at the reality of it all,It's up too the parent's to teach their children about saving and investing and saving ,the best investment is education no matter the cost's and being there,and the second was when i opened accounts for each of our daughters and the Lady behind the secure counter gave them a NAB small metal shaped like a Bank Building money tin and they start to save and become a saver..
     
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  11. MTR

    MTR Well-Known Member

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    Great thread
     
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  12. kierank

    kierank Well-Known Member

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    I was waiting to see the Smashed Avocado strategy :).
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Many clients I see actually relying on this - "I have a large inheritance coming" - "Oh parents sick?" - "no"
     
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  14. kierank

    kierank Well-Known Member

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    But will be soon :) :)!!!
     
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  15. Coota9

    Coota9 Well-Known Member

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    My kids have lucked out as I have already told them I am spending their inheritance
     
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  16. larrylarry

    larrylarry Well-Known Member

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    I have been teaching mine (10 and 8) financial literacy and will continue to show them by example. I will also help them if they have great difficulty getting into real estate investment.
     
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  17. Hamish Blair

    Hamish Blair Well-Known Member

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    I was thinking of setting up a trust for them and funding a townhouse development. Create some equity and cash flow, perhaps by selling one townhouse to reduce / repay some debt and hopefully result is neutrally or even positively geared.

    Just done our own three townhouse development and the kids enjoyed the process and learned lots.
     
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  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Thanks to Hamish,

    11. Discretionary Trust

    Another option is to set up a discretionary trust with corporate trustee to own property now. When the appropriate time comes you can then transfer the control of the trust by changing the directorship of the trustee company from you to the child. You can retain control of the trust via remaining in control of the appointor position or your even change the appointor to the child as well as you, or instead of you.
     
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  19. Tony66

    Tony66 Well-Known Member

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    Good post Terry....when the parent is 1 or 10% how does this affect on the borrowing amount when applying for a mortgage? The child has to have a good income and serviceability I suppose?
    Thanks
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Lenders will look at the income and liabilities of all borrowers so a strong parent can pull up a weaker kid.
     
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