# Family - Selling a property to Adult Child



## Fly_fisher (May 1, 2016)

Hi,

My inlaws are considering selling their house to my wife and I. They are recently retired and we are looking to enter into the housing market.

They bought the Old house 20 years ago for $200 000. They lived in it for 10 years as their Principal Residence and have rented it out for the last ten years. They currently live in another New house as their Principal Residence that they bought ten years ago. The Old house is worth $800 000 at current market value. The Old house has had its mortgage paid for.

My wife and I are trying to figure out what the most beneficial situation would be for both parties involved.

A) Would an "owner financed" sale be beneficial? Whereby we pay the Inlaws an agreed amount of money each month to an upset sum?
This would allow us to purchase the house, provide the inlaws with more money than they are getting from their renters, and not require us to take out a mortgage.

B) Would having the property in "Joint Tenancy" or "Tenants in Common" work?

C) Would "gifting" us the home work? Then we would "gift" back a monthly payment every month to an upset sum.

D) Or, selling us the property and a discounted price

E) Should the inlaws move back to the "Old House" for a period of time before the sale? Or should my wife and I move into the Old house as our principal residence for a few years.

The goal for everyone is to minimize all fees and taxes and transfer the title to my family. The inlaws especially want to minimize Capital Gain taxes.

What is your advice on Family and property sale?

Thanks


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## carverman (Nov 8, 2010)

Fly_fisher said:


> Hi,
> 
> My inlaws are considering selling their house to my wife and I. They are recently retired and we are looking to enter into the housing market.
> 
> They bought the Old house 20 years ago for $200 000. They lived in it for 10 years as their Principal Residence and have rented it out for the last ten years. They currently live in another New house as their Principal Residence that they bought ten years ago. The Old house is worth $800 000 at current market value. The Old house has had its mortgage paid for.


My wife and I are trying to figure out what the most beneficial situation would be for both parties involved.

If this house was rented out for 10 years, and not the inlaws principle residence, depreciation and income from rent declared on taxes, there could be a FMV , purchased for $200k and now worth a lot more, there could be capital gains payable. 

However, I'm not sure on this as we don't know the complete circumstances.
I would presume that inlaws are listed on the transfer deed as joint tenants (spouses of each other) .



> A) Would an "owner financed" sale be beneficial? Whereby we pay the Inlaws an agreed amount of money each month to an upset sum?
> This would allow us to purchase the house, provide the inlaws with more money than they are getting from their renters, and not require us to take out a mortgage.


Again, not completely sure on this.. but, if the house was a rental up to now, and you decide to live in it, even if you pay the inlaws more than the renters per month to include what the mortgage payment would be, it's a "convenient family arrangement", the validity of this arrangement would have to taken into account, that you are still "paying rent" , and the title will still be in the inlaws names, including being on the tax rolls, 

Unless a lawyer is involved to change the title for a specific sum from them to you, capital gains may be payable on FMV. 
Others on CMF may have a better answer. 



> B) Would having the property in "Joint Tenancy" or "Tenants in Common" work?


Not sure but I believe that would be seen legally as the same as selling the property? Each person (assuming there are 4 parties in this case) would have an equal
share in this property. It could also make it more difficult to sell later, but anything is possible. not sure if FMV would have to be assessed in this case to establish how much each party is allotted from the FMV, but in any case, I believe a land transfer deed would have to be done again, and registered in the country Land records office by a legal professional. 
Land transfer taxes may be applicable too..don't know. 

http://estatelawcanada.blogspot.ca/2010/01/joint-tenants-vs-tenants-in-common.html



> C) Would "gifting" us the home work? Then we would "gift" back a monthly payment every month to an upset sum.


I know from my experience, my mother gifting her share of my home (not marital and purchased after separation but before final divorce) worked for us. 
All I had to do was find a lawyer here in Ottawa and my mother the same in Toronto. The land transfer document was done to make me 100% owner of my principal residence and reduce any capital gains payable by her estate after her death. Our house listed as joint tenants NOT spouses of each other, was always my principle residence but never
my mother's, who has a principle residence in Toronto. 
Not sure how it would work in your case though as your inlaws are not blood related family members. 



> D) Or, selling us the property and a discounted price
> E) Should the inlaws move back to the "Old House" for a period of time before the sale? Or should my wife and I move into the Old house as our principal residence for a few years.


Who still owns the house legally,that's what is important in the eyes of the taxman (taxmen).
If the taxmen already know the house was a rental for 10 years, it was an income property, not a principle residence.
Without a title change and perhaps land transfer tax payable, it doesn't matter if you move in and consider it youyr principle residence...you
are not the official owner(s) of the property and some paperwork would need to be done now, as I explained.

You can certainly move in, pay a specified sum, in lieu of a mortgage payment to your inlaws,but the fact remains, until there is a title transfer, you are no different than the renters.
I believe and if both inlaws pass away,that property will be considered part of their estate to be evaluated
at FMV and sold. Capital gains would be payable.



> The goal for everyone is to minimize all fees and taxes and transfer the title to my family. The inlaws especially want to minimize Capital Gain taxes.


beating the taxman is always a challenge..good luck.


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## OnlyMyOpinion (Sep 1, 2013)

The short answer - talk to a real estate lawyer.

A) You are mixing the financing options of your 'purchase' with the capital gains implications of their 'sale'. They would presumably want some protection against default of the loan. The lawyer can offer suggestions.

B) Joint tenancy, etc. - not recommended, there is just too much potential for problems despite all good intentions (divorce, death & estate, improvements & maintenance costs, etc). They would still have to pay tax on the gains of the portion they 'sold' or were deemed to sell to you.

C) Gift the house - They would still have to crystalize their gains of this rental income property. From what you say it sounds like this might be: $800k minus the FMV of house when it ceased to be their principal residence and became a rental income property divided by 2 if it is was owed jointly, then half of this amount will be taxable. So if FMV was $300k when they converted it to a rental they would each have taxable capital gains of $125k ($800k-$500k/2 x 50%). Perhaps they have some capital losses they could crystalize at the same time? I think Ontario, etc also has a nasty land transfer tax?

D) Selling to you at less than FMV - would be their decision but they would still be 'on the hook' for the capital gains based on its FMV when they sell.

E) They already own a second house that is their principal residence, you can't have two principal residences. You couldn't move into the old house and call it your principal residence until you buy it from them.

Take consolation from the fact that you could do this through a good real estate lawyer - no real estate agent fees - you all win!


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## carverman (Nov 8, 2010)

OnlyMyOpinion said:


> The short answer - talk to a real estate lawyer.
> 
> Take consolation from the fact that you could do this through a good real estate lawyer - no real estate agent fees - you all win!


Even with a real estate lawyer, it may be an uphill battle to get around capital gains and land transfer tax.
in my case, my mother and I were on the land transfer deed at the time I purchased the house in 1996. I was not divorced yet, so my mother agreed to have her name on title 
to protect me from my greedy exwife that was bent on bankrupting me looking for "more gold". 
A couple of years ago, as my mom's health is not good, she decide to "gift" me her 50% interest in my property. My lawyer handled the details for a small fee and the customary consideration
of $1 to make it a legal transaction.

This way, when she passes on , her former interest in my property will not be part of her estate, and her half ownership of my property subject to capital gains paid by her estate.

however, we both have the same last name. 
i'm not sure how gifting works in a situation where the other party are inlaws.


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## OnlyMyOpinion (Sep 1, 2013)

carverman said:


> Even with a real estate lawyer, it may be an uphill battle to get around capital gains and land transfer tax.


Yes, as described it sounds to me like capital gains would exist.


> ... A couple of years ago, as my mom's health is not good, she decide to "gift" me her 50% interest in my property. My lawyer handled the details for a small fee and the customary consideration of $1 to make it a legal transaction. This way, when she passes on , her former interest in my property will not be part of her estate, and her half ownership of my property subject to capital gains paid by her estate.


Was your house both your principal residence and your mother's or just yours? 
I'm not a tax expert, but it sounds like 'my property' was jointly owned until she gifted you her half ownership? And if not her principal residence, did she get a FMV at the time of the transfer to crystalize her gain (presumably) and report it that year?


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## carverman (Nov 8, 2010)

OnlyMyOpinion said:


> Yes, as described it sounds to me like capital gains would exist.
> 
> Was your house both your principal residence and your mother's or just yours?
> I'm not a tax expert, but it sounds like 'my property' was jointly owned until she gifted you her half ownership? And if not her principal residence, did she get a FMV at the time of the transfer to crystalize her gain (presumably) and report it that year?


My house was always my principle residence. My mothers principle residence was in Toronto and still is. 
It was easier for us to transfer her 50% stake in my house as being her son as a gift to me.
She is allowed under law to gift part of her estate to me while still living and FMV was not necessarty, snce
I continue living in my principle residence.

There was no reason for her to remain as co-owner in 2014, as a joint tenant, after my divorce in 1998.

Of course, the ex's lawyer wanted to see the deed prior to divorce trial, and where I got the money for the down payment (25%) which my mother provided to close the deal.

I signed the mortgage with the bank myself, she was not involved and I paid off the mortgage myself and got a 
discharge from the bank, once she signed the papers (if memopry serves me), because she was still on the deed.

In 1997, Once my ex's lawyer found my mother was c-owner, it was no longer an issue that I should include all of the property or down payment, just half at the purchase price as an asset, during the financial discovery phase of the divorce trial.


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## Fly_fisher (May 1, 2016)

Thanks for all the input. I still am left with an unclear direction on which is the best way to proceed. There is no immediate rush for us to "own" the property but we do want to transition the ownership to my wife and I eventually when it makes sense financially for both parties.

My wife did live in this house - it was her childhood home for many years.

Does anyone else have an experience on how they handled this type of transaction?


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## carverman (Nov 8, 2010)

Fly_fisher said:


> Thanks for all the input. I still am left with an unclear direction on which is the best way to proceed. There is no immediate rush for us to "own" the property but we do want to transition the ownership to my wife and I eventually when it makes sense financially for both parties.
> 
> My wife did live in this house - it was her childhood home for many years.
> 
> Does anyone else have an experience on how they handled this type of transaction?


If you are still happily married and don't mind your wife being on title, you both could ask the inlaws to gift the house to her. 
Not sure if they can gift it to you as well though, being "spouses of each other" .
Although if it was a rental recently, owned by her parents, capital gains taxes on 50% of the appreciated value still applies as her parents would have a different address for their principle residence, 
and it probably doesn't matter if any rental income was reported during the rental years. 
Sooner or later there could be an audit about the property or rental income.


The capital gains rules can be complicated.


> For example, you could make a gift of your home and if it was your principal residence for each year you owned it, the transfer will be tax-exempt. To qualify as a principal residence you, your spouse or child must have ordinarily inhabited it.
> 
> You also could transfer a non-principal residence, such as a cottage or a rental dwelling, to an adult child and it could qualify as the child's principal residence if the child occupied it. You would be liable for any accrued gain up to the time of transfer, but assuming the home remained your child's principal residence, there would be no further taxable gain for the child.


Read; CRA's positiion on family gifts

http://fbc.ca/knowledge-centre/whats-cras-position-family-gifts


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## Just a Guy (Mar 27, 2012)

Okay realistically, if your parents did things correctly in the beginning, they bought the place 20 years ago and benefitted from 10 years of gains for free. At that time, they should have documented the value of the property (some sort of official appraisal would have done) and converted it to a rental.

The following 10 years, they benefitted from a steady income as well as capital appreciation. As well, they took advantage of the country's infrastructure, health care benefits, probably some form of government subsidy like old age security, etc.

Where do you think the money for roads, transit, garbage removal, benefits, etc. Comes from? It's a little thing called taxes.

While personally I'm not a big fan of the way governments spend money sometimes, I realize that I do benefit from the taxes people pay and am resigned to paying my fair share.

In this case, if you do things properly and don't try any complicated tax evasion schemes, your parents would be taxed on the last 10 years of capital appreciation on the property. So, the increased value from the appraisal 10 years ago (which somehow I suspect was never done) and today. This gain would be favourably taxed with the 50% of it tax free and, if they are on joint title, they can income split the remainder lowering the taxes even further, paying a very reasonable, small amount of tax. Also, if they ever had any capital losses (even from their stock investments) these can be deducted from the gains. You may also want to delay the sale until a year where they can lower their personal income. 

Now, if there was no proper appraisal 10 years ago, this can become very messy. Your parents didn't do things properly and you are looking for ways of tax evasion as opposed the minimizing the taxes owed. This is a good recipe for getting into serious trouble with CRA. The rules are set up so that people contribute a fair share to society, things like you're "gift/gift" idea are not tax efficiencies, they are tax evasion. Capital gains are the lowest form of tax people pay. 

If your parents want to avoid paying capital gains, it's best they keep the property until the value falls below what it was worth 10 years ago, or until they die (at which point it'll become part of their estate and probably taxed higher as there will be less ways to income split and deduct losses) when it'll be taxed with everything they own.

They should be glad they are paying taxes, it shows they are actually making money...okay, I hate paying them too, but it's their social responsibility to contribute their fair share.


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## twa2w (Mar 5, 2016)

Ok, to summarize a bit.
In laws bought 20 years ago and paid 200,000 and lived in house as prin res.
10 years later they moved to a new house and began renting this one. Lets assume it doubled to 400,000 in value. This gain in value is tax free due to prin res exemption.
Now house gas doubled again in value to 800,000. And they decide to sell or give the house away. 
In either case, as far as CRA is concerned, they will have a gain of 400,000 to report and 1/2 of this, 200,000, is taxable. As they are joint owners, they will declare 1/2 each or 100,000 extra income. Now depending on how the property is sold, there may be some options to spread this gain out but it will have to be declared.
If the house was not appraised 10 years ago when the usage sold, they will have to find a way to come up with a value that will keep CRA happy. CRA knows this happens a lot so as long as valuation then and today seem fair, they will accept it providing you can justify it.. If you have fair market tax assessessments and you can show they trade vslues fairly closely in your area, thry may accept this. If not, a letter from an appraisser showing a few homes on the street selling 10 years ago, should do the trick.
The issue of selling or giving it to their daughter and you is a separate issue. If the house is gifted, is she the only heir or would other siblings be upset. If gifted, do the inlaws have the cash to pay the income tax on the capital gain. Are they worried that if they gift it, and you and their daughter divorce a year later that you could get 1/2 the value of the house - do they know or care.
There are lots of scenarios here as to transfer of title.
They can gift outright.
They can sell for full or reduced price and you can arrange your own mortgage.
They can sell for an agreed price and take back a mortgage, registered on title, and you make mortgage payments to them. The mortgage could be forgiveable on their death or earlier at their descretion of course.
They could gift to you ( on paper)and register a mortgage on title to protect their daughters interest under family law. The mortgage would be repayable.
I believe in Ont a mortgage has to have some interedt and some repaymt to be legal.
If they sell property, land transfer tax is payable on the sale price. If they gift property, I believe you can avoid the tax as it is between parents and daughter/sil however the rules may have changed on this
The parents financial situation and other heirs will certainly affect their decision. Alsowill you feel comfortable paying a mortgage to inlaws. Will they hold it over your head? Etc etc.
Here is my suggestion based on some assumptions. Assume they want to give a break on the price and they do not have the money to pay the tax.
They sell the house for a reduced amount and you arrange a mortgage based on that amount. This goes to the inlaws and they pay the taxes and maybe have some cash. They register a second mortgage for the difference between value and sale price to protect their daughters interest. This they can forgive later or on their death. If you decide to sell the house later, they can decide to forgive or you can repay them or they can transfer to the new house you buy.
You need to sit down with your inlaws to determine their wishes.


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## carverman (Nov 8, 2010)

twa2w said:


> Ok, to summarize a bit.
> In laws bought 20 years ago and paid 200,000 and lived in house as prin res.
> 10 years later they moved to a new house and began renting this one. Lets assume it doubled to 400,000 in value. This gain in value is tax free due to prin res exemption.


The house should have been valued at the time when the parents changed their principle residences. you cannot assume ANYTHING when it comes to paying taxes and the taxmen. CRA and the Ont gov't tax man. 
Capital depreciation could have been applied for all those years of renting..new roof, new furnace etc etc. 



> Now house gas doubled again in value to 800,000. And they decide to sell or give the house away.
> In either case, as far as CRA is concerned, they will have a gain of 400,000 to report and 1/2 of this, 200,000, is taxable. As they are joint owners, they will declare 1/2 each or 100,000 extra income. Now depending on how the property is sold, there may be some options to spread this gain out but it will have to be declared.


Whatever..however..if they bought it for $200K 20 Years ago, and didn't do a valuation before renting it out as income property, then the full amount would be considered in the FMV..in other words..IF the house is valued at $800K now, then $200K minus $600K in appreciation (even if they lived in it for a while) will now be considered for capital gains..that could be as much as 50% of $300k would be subject to capital gains tax.

This is why one needs a FMV valution on paper that can be used for capital gains purposes
BEFORE starting to rent it out..not 10 years after. Lots of owners fall in this trap with cottage properties..they use it or rent it out for a few years without checking what the FMV is worth..then get hit with huge capital gains (offset maybe by some capital losses).



> If the house was not appraised 10 years ago when the usage sold, they will have to find a way to come up with a value that will keep CRA happy. CRA knows this happens a lot so as long as valuation then and today seem fair, they will accept it providing you can justify it.





> If you have fair market tax assessments and you can show they trade values fairly closely in your area, they may accept this. If not, a letter from an appraiser showing a few homes on the street selling 10 years ago, should do the trick.


How could you justify that unless..you could find an identical house and property that sold for $X 10 years ago and you fill out the necessary paperwork to make it a proper FMV estimate. 



> If you have fair market tax assessments and you can show they trade values fairly closely in your area, they may accept this. If not, a letter from an appraiser showing a few homes on the street selling 10 years ago, should do the trick.


If you can find an real estate appraiser willing to put down in writing what the property MAY have been worth 10 or 20 years ago. 



> The issue of selling or giving it to their daughter and you is a separate issue. If the house is gifted, is she the only heir or would other siblings be upset. If gifted, do the inlaws have the cash to pay the income tax on the capital gain. Are they worried that if they gift it, and you and their daughter divorce a year later that you could get 1/2 the value of the house - do they know or care.
> There are lots of scenarios here as to transfer of title.
> They can gift outright.
> They can sell for full or reduced price and you can arrange your own mortgage.
> They can sell for an agreed price and take back a mortgage, registered on title, and you make mortgage payments to them. The mortgage could be forgiveable on their death or earlier at their discretion of course.





> They could gift to you ( on paper)and register a mortgage on title to protect their daughters interest under family law. The mortgage would be repayable.
> I believe in Ont a mortgage has to have some interest and some repayment to be legal.


And also REGISTERED as mortgage by a lawyer. A monetary gift going towards the mortgage, or family loan arrangement does not hold any water in a divorce.
I know that from experience. My mother helped to pay off the mortgage on our marital home that I used to have, and
when it came to divorce, my mother could not reclaim any of her payments to the property, because it was listed on title as a marital home, and with a mortgage on payable to a credit union. 

My mothers instalments to pay off the existing mortgage faster backfired when she tried to claim those payments during divorce. As far as the ex was concerned those payments were a gift to her son. The equity were split 50-50 when it sold upon divorce.
Unless the mortgage is registered by a lawyer and payments are made regularly with or without interest, it is meaningless in the courts. 



> If they sell property, land transfer tax is payable on the sale price. If they gift property, I believe you can avoid the tax as it is between parents and daughter/son, however the rules may have changed on this.
> 
> The parents financial situation and other heirs will certainly affect their decision. Also will you feel comfortable paying a mortgage to inlaws. Will they hold it over your head? Etc etc.
> Here is my suggestion based on some assumptions. Assume they want to give a break on the price and they do not have the money to pay the tax.
> ...


^^^ Agreed. Otherwise it becomes very messy when the marriage breaks down. better to seek a lawyer and draw up the necessary
paperwork and pay the legal fees. makes it so much easier in the long run.


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## AltaRed (Jun 8, 2009)

As pointed out, there are few shortcuts and often a lot of pain when it comes to transactions such as this.

Cap gains will be due on at least the 10 year period and ACB of the property is an unkown at this time...subject to some historical evidence that can be uncovered. As Twa2w points out, CRA runs into this all the time and they just want to be sure the taxpayer is not getting 'the short straw' from an individual pulliing a fast one on valuation. RE agent numbers are useless (goes to show how much CRA thinks of RE agents and their integrity, eh?).

Structuring the deal needs to be done with the right paperwork. There is no shortcut given potential future issues regarding potential preferential treatmet in regard to inheritances (brings out the worst in a lot of people, i.e. total blindside) and marital breakdowns.


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## twa2w (Mar 5, 2016)

"if they bought it for $200K 20 Years ago, and didn't do a valuation before renting it out as income property, then the full amount would be considered in the FMV..in other words..IF the house is valued at $800K now, then $200K minus $600K in appreciation (even if they lived in it for a while) will now be considered for capital gains..that could be as much as 50% of $300k would be subject to capital gains tax.
NOT TRUE 

This is why one needs a FMV valution on paper that can be used for capital gains purposes
BEFORE starting to rent it out..not 10 years after. Lots of owners fall in this trap with cottage properties..they use it or rent it out for a few years without checking what the FMV is worth..then get hit with huge capital gains (offset maybe by some capital losses)."

Of course they should have had it valued when the usage changed but few people do. I am assuming these people did not so I provided them with a scenario of how this would work. I have dealt with CRA on identical issues several times and you can look up tax cases easily enough. They will accept an estimation of value providing it is reasonable and you can support it. An appraisal after the fact is not much fifferent than one provided at the time. They are both based on similiar homes with adjustments. Although sometimes sales data from years ago is hard to obtain. I have seen CRA accept a WAG because it was reasonable. Basically it was, I sold my house for X which is the current average selling price, and when I converted use, the average selling price in the neighbourhood was y according to this old magazine article so that is my acb. This is no different from people who have stocks held for years with dividend reinvestment plans or monthly stock purchases through a plan. Many do not track ACB. You would be surprised how accomodating CRA is on accepting estimates providing you have a letter of explanation and apologize.
Any way that is the inlaws problem to deal with.


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