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March 18, 2018 | Kids

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Lalanah is a mother of three who loves her kids. How much? Enough to hand over a big wad of money to assist her son, Taras, to buy a home for his family in an insane real estate market.

“I said to him that I could lend him the money for the property and he could pay me back,” she later said. “I expected that he would do the right thing, and pay in five or seven years.” But the kid had other plans. He took the $500,000 when in his twenties, bought a property, then flipped it and later – when be became an architect – used the inflated proceeds to build a luxury, five-bedroom home. More than a decade later, he had no intention of repaying the Bank of Mom.

“There was no loan,” Taras insists. “No discussion of payments.”

So she sued him. And won. Judge Ted Woodward ruled there has been “serious allegations of dishonesty and fraud” and ordered the ungrateful spawn to pony up the better part of $300,000, plus interest and legal costs.

You didn’t read about this in the MSM because the case was tried in Melbourne, where house prices have been as insane as those in Vancouver and Toronto. And in Oz this seems to be getting more common – two judgments handed down in favour of parents in dispute with adult children in the past two months. The kids say they were gifted the cash. The wrinklies insist it was a loan. It’s the stuff that can tear a family apart. The children crave a house and expect generosity. The parents want to retire and assume respect.

In Canada BoM lending has been massive – estimated to play a role in financing at least a third of all transactions. So pervasive was the “gifting” of down payments to children without their own money so they could qualify for conventional mortgages that the federal bank regulator brought in the B20 universal stress test. Family cash was circumventing rules put in place to ensure real estate buyers had the means to afford the properties they were closing on. Suddenly bank mortgage portfolios filled with loans to high-risk borrowers who skirted CMHC insurance. So as a result everyone has to prove their ability to carry a mortgage, regardless of where they got the deposit. Ironically, the Bank of Mom ended up making home ownership less attainable.

Meanwhile the demographic weirdness builds. The nation’s basements are brimming with clingy adult children unwilling to venture forth into a scary, expensive world. In the past 15 years the number has jumped 13% while the total of young adults living with a spouse has plunged 15%. In 2014, for the first time in 130 years, more adult kids lived at home than on their own. Four in ten university or college grads end up with their parents. It is a phenomenon of modern life that has a potentially debilitating impact on family finances and the retirement plans to millions of parents.

The handing over of real estate down payments not only puts those plans at risk, but also help perpetuate a bubble real estate market – especially when the old geezers dip into their own house equity to come up with the cash. Prices continue to rise as the money flows, instead of meeting a natural resistance as newbie buyers are priced out. Once again, the Bank of Mom just makes things worse. Ironically, however, a recent bank poll found almost 80% of parents are willing to do exactly that – which might show how desperate many of them are to get the squirts gone.

Well, if you fork over bags of cash to Junior, know the implications.

Yes, you can gift money without tax consequences. No deduction to you. No tax payable by them. If you borrow against your home on a HELOC to get the cash, the interest is not tax-deductible, unlike borrowing to invest in your retirement portfolio (then it’s 100% deductible).

If this is a loan, have your lawyer draft a legal agreement with repayment terms, default conditions and security for the borrowing. If it’s a gift, you’ll need to document that, spelling out that it need not be repaid. Mortgage lenders require that document as proof the money has become the property of the kids before financing will be extended.

No, don’t gift your adult children securities, real estate or other assets. That is seen as an in-kind transaction, which is a taxable event – a ‘deemed disposition.’ It’s the equivalent of a sale, so capital gains taxes will apply.

And don’t co-sign or guarantee a mortgage unless you truly know the risks. In this instance you’re 100% responsible for anything that goes wrong. Missed payments. Marriage breakup. Job loss. Or if your daughter vanishes to Katmandu to find herself. Whatever. Then it’s your mortgage to pay even if you don’t have clear title and cannot sell the property.

Finally, remember this: money changes everything.

It took me a long time to know that. What a discovery.

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March 18th, 2018

Posted In: The Greater Fool

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