Gifts, Loans and other musings
Good morning!
It’s no surprise to readers of this newsletter that real estate (and life!) is expensive. It’s hard if not impossible for young adults to enter the real estate market without help. The Bank of Mom and Dad is one way that young adults have been able to gain a toehold in the market.
One way a parent can help their kid is to give an outright gift. Parents give all or part of the down payment to their kids. Legal tidbit of the day: it is a condition of (almost) every mortgage that a borrower does not have additional financing on their home – in other words, having a second mortgage is a technical breach of the first mortgage. To satisfy this bank requirement, parents sometimes write gift letters to their kids – saying that the gift is a true gift, the parents aren’t loaning it to them, etc.
However, this strategy may come with risks! A gift letter may be used against a parent by an aggrieved creditor down the road (think: ex-spouse…). We recently read about a BC dad who can’t get back $500k he gave to his now-separated son and daughter in law for their home purchase (https://biv.com/news/economy-law-politics/bc-dad-cant-get-back-500k-he-gave-now-separated-son-daughter-in-law-for-home-10104723).
There’s a lot of other factors at play in this case, but importantly in our mind, the gift letter that the parent gave to their child ended up being used as evidence that the money was meant as a gift and not a loan. In other words, the son and ex-spouse split the gift 50/50 versus the son receiving 100% of the gift.
There are a number of ways to mitigate this risk without upsetting the Bank giving the first mortgage. Each strategy has varying levels of certainty and risk, and some are more expensive than others. But if you, or your clients, are planning on helping their child enter the market, it is certainly worth a conversation with a legal professional.
As always, we are happy to help and appreciate your support.
PS: on a different note – we have updated our Knowledge Centre to include more up to date information on the BC Flipping Tax. Please visit us online here: https://bcrealestatelawyers.com/knowledge-centre/legal-issues-faqs/bc-home-flipping-tax/