How to help your adult children buy a house

Many business families are focused on helping their adult children purchase a home – the primary purpose of many family businesses are so that the business can provide for future generations.

How a family in business helps a child purchase a home, or develop a property portfolio, are wide and varied.  And the impact of helping a child, the tax consequences, the accounting treatment, structuring, and communicating that help across the family are incredibly important.  If property is in Perth the local tax issues must be compared to buying interstate.

And we have detailed a few strategies we have seen to date which are in addition to the First Home Super Saver.

Accessing great networks

Getting access to great advice is difficult for many young people.  A well-connected family in business can focus on their property networks, tax advisors, accountants, lawyers and presenting opportunities and strategies for your children to locate and finance their home.

Lend the children a deposit

A child may not have enough money to obtain a loan for their Perth dream house or they might be required to purchase expensive lenders mortgage insurance.

Providing a child with an unsecured loan can be a big step-up for a child.

The loan should be structured properly and documented.  It does not need to attract an interest rate for tax reasons if it is made personally but tax law might require interest if lent from a company.

The family estate plan and org chart should incorporate the unsecured loan.

Parental guarantee

Some parents will offer real estate to provide a child with additional security to assist in the loan application.  The property could be an investment property, commercial real estate used in the family business or even the family home.

This strategy comes with risk (you do not want the family to lose it all) and the business family should update their documents to discuss the extra risk of different assets.

A parental guarantee from a company owned asset can be tax effective as Division 7A of the Tax Act does not apply to guarantees for private assets.  The call upon the guarantee could affect the operation of Division 7A of course.

Lend the entire purchase price

The income generated on cash for some families is now struggling to generate half a percent.  So lending the child the full mortgage might make good economic sense from a family business aspect and a family succession strategy.

Depending on the structure of the loan the interest charged might generate taxable income and documenting the loan is important for future communication.

In this instance the family can also consider taking the property as security to protect the asset.

Buy the property yourself

If you purchase a property for a child you have the benefit of control if the child is divorced or bankrupt.  And a tax impact might be that the property will become taxable on sale.

The tax profiling and financial modelling of this strategy is important to understand the short term (and significant) cost of getting money out of a company as compared to losing the main residence exemption on ultimate sale.

There are also other state tax issues to consider like land tax.  Fringe benefits tax on the unpaid rental income might become relevant for some instances so holistic tax advice is needed for this approach.

Employ the child

Many business families will remunerate a child working in the business through dividends and trust distributions to save on payroll tax.  And this saving can be significant – $500k of family wages restructured can save $27,500 in payroll tax.

Sadly the profit remuneration through dividend can make some bank loan applications difficult (not all).  However employing the child might make the child’s chances of “standing on their own two feet” easier and is a possible strategy.

Buy the property as trustee

If you are contemplating buying a house for an infant (under 18) the child cannot go on the title.  So some families in business will buy the home as a bare trust and then transfer the home to the child when they reach a certain age.

This strategy can help in that the ultimate transfer to the child will be free of stamp duty and capital gains tax.

Of course the family values and communication about purchasing a house for a minor should be discussed – but this type of transaction is not that uncommon.

Transfer an existing house

The transfer of a home to a child can attract stamp duty and capital gains tax at the market rates.

It is important to get cashflow advice on the tax cost of doing the transaction and comparing the option of simply buying another property.

Gifting the deposit

The gifting of a deposit is also a possible option.  We typically recommend a deed of gift to get clarity on the fact that it was in fact a gift made and later or (for matrimonial or bankruptcy) there is a clear understanding the parents are no longer entitled to the deposit.

Getting family communication about the gift is important as is connecting the gift to the family values.

A gift made will need to be form the parents own money.  Gifting money from within a company could attract extra taxes but these could be managed as well with good advice.

A final word

Helping a child get quality housing is a common and important priority for families in business.  Part of the process of making sure children in the business are focused on the business and the family is to make sure that they are safe in their accommodation.

Ensuring children are physically close enough to the rest of the family (rather than miles away) also helps keep family connections current.

The clear communication of the assistance among the family is important.  Conflict in a family is common.  As is the consideration of the tax impact of the assistance.

At Westcourt we help many business families navigate the complex tax, accounting, business and family issues when looking to assist and succession for the next generation – including property succession.  We don’t sell any product so you are always confident of independent advice – call us for a quick chat and you will be surprised at the options available.

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