Dear David,

My parents are offering to gift me the down payment for my first home. I’m so grateful and excited! Is there anything I need to know in terms of tax implications, strings attached, or how the bank looks at this type of arrangement? – THANKFUL BUYER

DEAR THANKFUL: A gifted down payment can be a wonderful boost, and it’s becoming more common for parents to help their grown children get into the housing market by passing along an early inheritance. People are living longer, which means the inter-generational transfer of wealth is taking more time than it used to. I often encourage families to consider passing on some of their wealth sooner rather than later if they are in a position to do so.

Helping a young adult get into their first home five or ten years early can be life-changing. Those extra years of ownership translate into increased mortgage paydown, equity growth, stability, and financial confidence. By passing on some of their wealth now, the giver can watch it make a difference, and share in the joy of seeing it put to good use.

It is vitally important that such a gift be handled clearly and properly. In Canada, there is no tax payable by the child when a parent gives them money as a gift, but there may be tax consequences for the parents, depending on where the money comes from. If the parents sell investments to free up the funds, there could be capital gains. If they withdraw from an RRSP or RRIF, that withdrawal may be taxable. So while the home buyer will not pay any tax on their gift, the parents should check with their accountant before moving money to ensure there are no surprises.

The bank will want to know if the money is a gift, or if it’s actually a loan. Lenders want to confirm the funds won’t have to be repaid, as repayment would affect the buyer’s debt obligations and mortgage qualification. Typically, the lender will require a gift letter signed by the parents that confirms the amount of the gift, who is giving it, their relationship to the buyer, the property being purchased, and the fact that the funds won’t need to be repaid. The bank may also want to see a clear paper trail showing the money leaving the parents’ account and arriving in the buyer’s account, which is normal. It’s important to avoid calling something a gift if there’s a private understanding that it must be paid back, as doing so can create problems with the lender and tension within the family. If the parents expect repayment, ownership interest, control, or a say in future decisions, then the money isn’t really a gift.

PRO TIP: If the buyer is purchasing with a spouse or partner, or if there is any concern about siblings, inheritance, repayment expectations, or who the gift is really intended to benefit, get legal and accounting advice. If the parents can afford to give money and don’t need it back, if the lender receives proper documentation, and if everyone understands that once the gift is given it belongs to the buyer and is being used toward their home purchase, accepting the gift is a great thing. Just make sure it is discussed openly and documented properly before the purchase offer is written. #Advice #AskDavid #TheNegotiator 

David is a top-selling Broker in Kitchener-Waterloo Region. He works personally with you when selling or buying your home. Moving? Get it right. Ask David today! Call or text 519-577-1212.