Comments on: Rent a House to my Parents?

By: Ms Save Money

Ms Save Money — Wed, 09 Dec 2009 16:46:15 +0000

@ Chain link – In asian cultures – it’s actually rude to be charging your parents rent. When you’re grown you’re expected to take care of them.

By: Jacob

Jacob — Tue, 08 Dec 2009 02:28:47 +0000

Another thing to consider is the Principal Residence Exemption for those of us living in Canada. If the son were to own the home and own another home he would be required to pay Capital Gains on one of the two properties.

It would then be best for the parents to own the home as they would be able to take advantage of the exemption.

As for probate, it is possible to put the son on title without him being a beneficial owner until the passing of the parents however it would need specialized advice from both a tax lawyer and an accountant on how to set this up properly as CRA likes to look at these type of arrangements with a microscope. They will try to assess capital gains on his portion of ownership upon the parents death…

By: chain link

chain link — Thu, 03 Dec 2009 08:19:58 +0000

I would totally rent a house to my parents. At a discount of course.

By: Ms Save Money

Ms Save Money — Thu, 03 Dec 2009 01:52:18 +0000

@ Laptop Briefcases: I totally agree. It’s really hard to draw the line when they’re your family. Tough situation.

By: Matt

Matt — Wed, 02 Dec 2009 22:45:21 +0000

In my opinion, it is always the best to maintain as many primary residences within a family as possible. Capital gains don’t exist on primary residences, so it doesn’t make much sense in loaning money to child to then move in to the residence causing any gains in the property to now be taxed. Also, never put a child on title unless you know you are going to die before there are any substantial gains on the property. If one of the title holders dies, the property is deemed sold by the other party for tax purposes which can cause considerable tax consequences. I just went through this, so not a particularly wise tax strategy. Why not utilize the tax shelter while you can? As to probate fees, if you structure your life (family) properly and eliminate any debts before dying, it isn’t necessary to put the estate in probate. Alas, in the real world it seems that siblings tend to fight over everything.

By: Laptop Briefcases

Laptop Briefcases — Wed, 02 Dec 2009 21:35:36 +0000

Very interesting scenario. While it may work out financially, someone would have to settle for higher payments or lack of interest. It would be tough to work out a deal that really makes sense for both of you. It is a little tricky dealing with something like this with family. They may want to give you a great deal, but you may feel guilty about not paying interest or something like that.

By: Elbyron

Elbyron — Wed, 02 Dec 2009 19:05:12 +0000

Sarlock’s idea of having Mark replace his own mortgage with a mortgage on the new home has some merit (and of course many of the downsides mentioned in these comments). But you have to be very careful with the CRA. The interest on the mortgage is only tax-deductible if the investment has an expectation of profit. That means he would have to set the rent payments high enough that it fully covers all his expected costs. There is no way to rent it at a loss and still be able to make any tax deductions. This strategy might save Mark some money, but the high rent payments would cost his parents. I doubt he can “gift” some of the rent money back – the CRA would probably call that tax evasion.

By: Susan

Susan — Wed, 02 Dec 2009 18:46:28 +0000

The probate fee would likely be much lower than capital gains tax payable on a house held for 15 years. In Ontario, the probate fee is $15 per $1000 (less the mortgage if applicable). If the house were to double in value, the probate fee would be about $9,000. Capital gains tax payable at the lowest rate (say 17%) would be about $25,000 (and it wouldn’t likely be at the lowest rate if Mark has a job and rental income to add to the capital gains). If Mark owns the house, he will have to pay tax on the capital gain from initial cost to the date of sale. If the house is owned by his parents, it will be protected from capital gains tax by their principal residence exemption until sold or their death. If the house is held jointly with Mark, Mark would have to report his share of any capital gain from the date it went into his name to the date of the joint owners’ death or sale, while his parents’ share of the gain would be protected. If his parents own the house and then sell it and deposit the funds into a bank account held jointly with Mark, they would avoid both capital gains tax and probate fees as the balance in the bank account would pass to Mark on death not subject to probate fees. Also, as pointed out, if in Mark’s name, the house would be subject to claims by Mark’s creditors, including a spouse or dependents. Mark and his parents should get professional advice before moving ahead.

By: Rooney

Rooney — Wed, 02 Dec 2009 18:41:10 +0000

I agree with the other comments, to me it doesn’t seem like it’s worth the trouble, I don’t see the upside. Additionally, I would take issue with this statement: “At anytime in the future I could sell them the house at cost so as to not incur capital gains.”

My understanding is that selling the house to a family member would not be an arm’s length transaction, and thus you would need to prove to CRA (if they questioned you) that the house was sold at fair market value. It would be nice if you could just decide to sell the house at cost (or any figure you decide upon) to avoid capital gains, but I don’t believe this is possible. Those guys at CRA are pretty crafty. Every time a thought like this occurs to me to avoid taxes I check the tax code and they’ve got it covered…

By: cannon_fodder

cannon_fodder — Wed, 02 Dec 2009 15:56:36 +0000

I whole heartedly agree with abc. Don’t even think of doing this. I know my wife, if approached by any of our children during our retirement with this, would refuse this strongly and immediately.

You work so hard to own your home, and the emotional security that accrues with it, the last thing you want to be is a tenant. What is the upside for the parents? What is the upside for the son? What are the risks to either if circumstances change (one parent is no longer to take care of themself or dies, the son wants to start a family and buy his own home but can’t because of the capital tied up in the parent’s home)?

If you want to avoid probate fees and capital gains taxes, take out a life insurance policy on the parents and YOU pay the premiums. You will be the one who benefits so you should pay for it.

My mom proposed a similar idea to me – I would buy a condo and she would live in it. I only had to look at it as though it wasn’t my mother to realise that, for me, it wasn’t a good deal at all. When I factored in her poor health and the real possibility she would either not want to, or not be able to, live in it within just a few years of the arrangement and it was clear there was a lot of risk financially and emotionally.

By: Four Pillars

Four Pillars — Wed, 02 Dec 2009 15:50:43 +0000

Not worth the hassle and risk – unless the house value skyrockets you might be looking at $4k probate fees (calculated on a $300k house in Ontario).

By: Thicken My Wallet

Thicken My Wallet — Wed, 02 Dec 2009 14:57:48 +0000

It is not clear from the question what his parent’s retirement portfolio is. There seems to be an assumption that his parents can afford market rents indefinitely.

Why can’t the parents just buy a pre-built home?

If the intention of this home is to keep passing it down through generations, a possible option is a residence trust and have the trust hold title. You lose your principal home tax exemption but avoid probate.

By: abc

abc — Wed, 02 Dec 2009 14:40:03 +0000

I generally advise against mixing money with family.Aside from money, you have to consider the dynamics of your relationship. You can’t treat them as regular tenants. Consider these issues:

How are your parents finances? Can you afford to carry them if they need the help? What if one of them dies? Can the other afford to stay on their own?

What if you run into a financial situation and want to sell the property? What will you do? Evict your parents?

What is your relationship like? Any power struggles or control issues? Will they see it as “your” house or “their” house? How will small conflicts over the property affect your relationship?

I agree with the advice – let the parents build their own house and then gift to Mark via Will upon their passing.

Hope my comments don’t sound cold – of course you should love and respect your parents and help them if they need. Bottom line: can’t treat your parents like regular tenants so you have to consider wisely.

By: Sarlock

Sarlock — Wed, 02 Dec 2009 14:32:53 +0000

I don’t really see any benefits to structuring it as a loan/rental scenario. It may avoid probate fees, but it adds a lot of accounting headache for little or no benefit.

What could be done, though, is for Mark’s parents to gift the money to him, Mark buys the house with a small down payment and a mortgage, then takes the rest of the cash and pays down/off his own mortgage. This would reduce or eliminate his own non-tax-deductible mortgage interest and replace it with tax-deductible interest on the rental home, offset by rental income.

Downside to this is that Mark’s parents will have given away some of their retirement money. While Mark will benefit tax-wise in this way, Mark’s parents will need enough other money to be able to afford the rent on the home and retire comfortably.

Situations like this are all individual and need to have all of the facts on the table before a suggestion can be made. You also need to be very careful with regard to the CRA and how the transaction is structured. If it isn’t done correctly they could come after you for attemping to avoid tax (which is what you are trying to do… you just have to structure it correctly). Consult a tax professional.

By: Dana

Dana — Wed, 02 Dec 2009 14:30:01 +0000

Let the parents build the house and keep title in their own names. This will protect the house in the event that Mark ever has marital problems or creditor issues – the house would not be part of his assets.

If the primary goal is to save probate fees, Mark or the parents (or both) can pay the premiums on a small life insurance policy to cover the cost of probate when the time comes. Given the parents age, the premiums may be high, though.

By: The Financial Blogger

The Financial Blogger — Wed, 02 Dec 2009 13:43:06 +0000

An easier solution would be to put Mark’s name on the title and let the parent pay the small mortgage?

You would avoid probate fee, and it would come cheaper for everybody?

By: Commander T

Commander T — Wed, 02 Dec 2009 12:59:35 +0000

Another major risk to this plan is on the tax side. The CRA takes offense to a taxpayer claiming a tax loss on a property lent to a family member. The key is when renting to family members you must have a reasonable expectation of a profit. So while it is not impossible to claim a tax loss when renting to family members, it takes a solid set of facts.

So effectively, you can’t claim a loss, but if you claim a profit you will be taxed on it. Therefore you could charge rent such that income exactly equals expenses. This could be done by charging regular amount of rent and having an equalization payment in March or April which would equalize the revenue and expenses.

To tell you the truth all this would accomplish would be to put the title to the property in their son’s name to avoid probate fees. It really wouldn’t be tax efficient.