Helping The Next Generation
Sandy Richardson lays out the options for helping others into property.
1 April 2015
With house prices increasing and housing affordability on the wane, the home ownership dream is out of reach for many these days. As a property investor, there’s a good chance you’ll find yourself in a position to be able to help those you care for to climb the property ladder.
The good news is that two commonly-used options are available - Gifting a deposit and joint borrowing. We also see parents and children teaming up to buy, renovate and sell a property in the hope of using the profit as a deposit for the child’s first solo home buying effort — much like the premise of the reality TV show Our First Home. However, there are also tax obligations to watch out for in certain situations, of which, more later. For now, let’s look at gifting and joint borrowing.
If paying back the home loan each month isn’t a problem, but coming up with the deposit is, then gifting may be a good option. Gifting is exactly as it sounds; there is no expectation of repaying the amount gifted or any interest payments.
The amount you can gift is unlimited and depends entirely on how much you are willing to stump up with. Alternatively, if your child is unable to afford the payments as they stand, the amount you gift may be determined by how much is required to bring the purchase price down to a manageable level.
By gifting you will release full control and liability for the home loan to your child, while having no legal or ongoing involvement in the property or borrowing. This option is ideal for keeping your existing property or properties at arm’s length.
Joint borrowing may prove desirable when the child doesn’t have a large enough deposit and/or sufficient income to repay the home loan, and the parents have equity in their own property/ies to support the purchase.
Usually, this is set up as two loans, one as the amount the children can afford to repay and the other loan as the balance. The second loan would be in all names, with everyone exposed being responsible as borrowers for the loan repayments. A benefit of this option is you can limit the liability to only the amount of the loan in all names, but still retain some involvement in assisting the children into a home or in establishing their portfolio.
Typically, the loan in all names will be set up so it is repaid over a shorter term; therefore, releasing the parents from their obligations and passing control to the children.
Alternatively, the parents might also be released early if property value has increased. The children can borrow, in their own name, against the additional value to release the parents’ obligations.
Our First Home Approach
We sometimes see parents and children getting creative with these scenarios and mixing them to best suit their individual situations. A good example of one such approach hit headlines recently thanks to
Our First Home. In it, parents team with their kids to buy a doer-upper which they then renovate and hopefully sell for a profit. The profit is then gifted to the children to use as a deposit on their own first home.
This scenario may attract extra tax responsibilities that you should be aware of beforehand as the IRD has strict rules that determine when property investment becomes "dealing". This is laid out on the IRD website, but it all comes down to what they believe your intentions to be. If they believe your intention is to simply buy and sell for a profit, you’ll potentially have to pay tax.
No matter which scenario holds greatest appeal, it’s important to discuss the ins and outs with your team of professionals to ensure smooth sailing. With the right support and appropriate structure, you may assist the next generation of property investors.
Sandy Richardson is a sales manager at Bank of New Zealand and heads a team of property managers who specialise in residential property investment. Visit bnz.co.nz/rentalproperty or phone 0800 269 009 to find out more and to discuss your insurance options