Shares vs purchasing property for adult children

A spin on Terry's thread about property vs shares. Imagine Homer had $1M cash to invest.

Scenario 1:
Homer gifts Bart $1M on his 18th birthday, which Bart uses to purchase a property in Shelbyville. Bart moves in and establishes it as his main residence. After 6 months, Bart moves back into the family home in Springfield, invoking the 6-year rule. 6 years later, Bart sells the Shelbyville property and gifts the cash to Homer.

Scenario 2:
Homer invests $1M in VDHG.

Am I right to think scenario 1 would, on average, yield better returns? Why isn't this a strategy more commonly used by parents with adult children who don't yet have their own main residence? Are there any ways you would tweak this strategy?

Thanks!

 

Control. Death. Divorce. Profligacy.

 

Probably not right

 

Even if Homer was on the top marginal rate and Bart was on the lowest?

Are there ways to improve scenario 1 such that it becomes better than scenario 2? For example, lending the money rather than gifting it, not selling the property for 12 (or more) years etc?

 

What is Homer trying to achieve?

 

The highest capital growth

 

There is no leverage being used so don’t shares generally out grow property?
Wouldn’t he be better off leveraging into something.
‘
‘If it is just capital growth then ownership doesn’t matter

 

Ah okay. I was more just exploring whether there was a way for parents to take advantage of an additional main residence exemption, but perhaps it's not worth it.

 

Well, that is something different altogether.

The parents cannot get a second one, but an adult child could qualify. But lots of consequences.

You could then compare that property with capital growth but no tax to investing in shares, with tax

 

Yeah that's what I was trying to compare but I worded it poorly

 

Gifting could be a terrible idea

- bart could lose some or all the $1m. Perhaps to his former wife.
- Why would bart regift to Homer ? Homer and Marge may be close to applying for pensions given his terrible skills with giving money way. centrelink says - You have a mil. Pension = $0. Homer says thats OK i will give it back to bart. Centrelink says its gifted so still no pension for 5 yeears.
- Then Homer blows the $1m at Mo's. Bart cant beleive his $1m disappeared.

Capital growth is a outcome AFTER a decision. It cant be predicted. eg Stock market could crash or the property market could boom and then bust. Property investmnet also may have other cashflows. eg Property can be easily leveraged so $1m of cash can buy $3m of property. The $3m can produce a leveraged return so if it rose 10% its three times that of a ETF rising 10%. Harder with ETFs as few lenders want ETFs as security. Property also has costly entry + exit costs eg duty, agent fees etc Property must also be maintained. ETFs dont need additional spending.

 

Yes I agree, gifting terrible generally

 

Good posts here. Thanks OP for sharing