Are you thinking of selling your home to your adult child? If the timing is right, and this step is taken with care, it can greatly improve their life—and yours. By giving your daughter or son this opportunity, you can help them grow their wealth while also keeping your home in the family. Of course, to get the outcome you’re hoping for, you have to do it right.
The last thing you want is to strain your family relationships, put your finances at risk, or place an unexpected burden on your nearest and dearest. That’s why it’s so important to make an informed decision.
When you’re deciding whether to sell your home to your adult child, here’s what you should know…
Settling on a sale price
If you plan to sell your property at (or close to) what it’s worth, working with an appraiser is key. A qualified professional will look at various factors to determine your home’s fair market value. The resulting sum can be a great starting point when you’re setting a price.
Of course, many parents want to give their child a bargain. I’ve seen some go so far as to try to sell their home for a dollar! While it’s a generous thought, there are a few things you should consider before going this route.
Start by asking yourself whether you can sell your home for below market value and retire comfortably. In your rush to help someone you love, you may forget to think about your future. But the truth is, things are sure to be less stressful for all involved if you secure your finances first.
Another common reason parents sell for an artificially low price is to save money when tax season rolls around. If this sounds familiar, there are a few things you should know.
Income tax implications
From an income tax perspective, there’s no benefit to selling your home for a very low price. The truth is, your primary residence won’t be taxed as a capital gain. Selling for very little money won’t help you save on taxes that you don’t owe in the first place!
If the property you want to sell isn’t your primary residence—let say it’s a cottage—then a capital gains tax will likely apply. This means that if the real estate you’re selling has appreciated since you purchased it, you’ll likely be taxed on 50 per cent of the increase in value (at your marginal tax rate).
Here’s where many property owners get confused. While you can sell a cottage to a family member for $1, doing so won’t allow you to dodge the capital gains tax. The Canadian Revenue Agency will almost certainly treat the sale as though it occurred at fair market value. You and (eventually) your loved one will pay tax accordingly.
Should you gift it instead?
If your primary motivation is helping your child become a homeowner when they couldn’t otherwise afford it, gifting them with real estate is an option. This strategy will likely be far simpler than selling your property for next to nothing, and you’ll pay no gift tax in Ontario.
Here’s another major benefit. Your gift could be considered a transfer “for natural love and affection.” As a result, your transaction may be exempt from land transfer tax—a significant expense at both the city and provincial levels.
Of course, the above only applies to your primary residence. If we’re talking about a cottage, ski chalet, or other property that doesn’t meet this criteria, there will be tax implications for you and your child.
When it comes to your future, it’s not just the funds you’ll have access to that matter. It’s also about where you plan to spend your retirement. If you want to continue living in your home after you’ve transferred it to your child, setting up a life estate can secure your right to do so for the rest of your life.
After careful consideration, you may decide that it makes more sense to transfer your property to your child after you pass away. If that’s the case, there are ways to make things simpler for everyone. As just one example, setting up an alter ego trust can speed up the process and make it more cost-effective when you’re gone.
The bottom line
On the whole, you should think about how transferring property to a family member could impact your closest relationships. Be wary of putting your own retirement at risk, and talk to your children about how your home might fit into their future plans.
Whether you decide to sell, gift, or bequeath your property, working with the right professionals can provide peace of mind. Talk to a qualified financial advisor about your options, and—if you decide to sell soon—be sure you make the most of a talented real estate agent’s expertise!
Are you going thinking of selling your home to your adult child? Get in touch, and we can set up a time to discuss your needs.