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Real Estate Scenario #1: Parents in Control, Children with Ownership

This scenario was taken from “Real Estate Investing for Canadians for Dummies” by Douglas Gray, Peter Mitham.  This scenario depicts how you can maintain ownership and still produce a win-win situation for your children and your family.  Thought it would be useful to share:

Creative ownership arrangements aren’t as dubious as creative accounting!

Take, for example, the case of Duane and Madelyn, a professional couple in Red Deer whose three children were on track to start university in Edmonton within two years of each other. Because the kids would have to leave home, Duane and Madelyn decided to buy a property a 15-minute walk from the university and renovate a portion for rental purposes. They planned to rent out the basement while their children and their friends (who would pay a nominal rent) would enjoy the run of the main floor. The total amount of rental revenue from the property paid the operating expenses of the house, such as the mortgage and related interest, property taxes, utilities, maintenance, and insurance. And $1,500 was left over for Duane and Madelyn to put toward their retirement.

To make the deal work, Duane and Madelyn sought expert legal advice. They decided to put the house in the names of their three children, and received three key documents from their kids in return. One was a declaration of trust stating that the children were holding the property in trust for their parents and would, upon their parents’ request, transfer title back to the parents. The document also stated that any rental income in excess of operating expenses belonged to the parents. The parents also obtained a transfer of title document signed by the children, which the parents kept unfiled. The third document was a letter from the children assuring Duane and Madelyn that the property would remain free of all financial encumbrances, such as another mortgage, line of credit, or judgment filed against it for a debt.

The agreement gave Duane and Madelyn full control over the property, but also ensured that their kids had a place to live. When their children graduated, they could arrange to sell the property and allow the children to retain the net proceeds without any capital gains tax as the property was the children’s principal residence. This could pay off most, if not all, their student loans. However, if the parents needed the money, or the children turned out to be prodigal, Duane and Madelyn could exercise the trust declaration and file the transfer document giving them full ownership. They could sell it, and pay any capital gains tax as an investment property, after getting tax advice on the best tax strategies.

I truly believe one of the two main functions of a professional Realtor is helping you build relationships and make the right connections.  Take into account not just the business and investing experience of the Realtor you work with, but also the perspective of other professionals that come from age, life experience, and long-term goals.