Does buying a home with a parent create a tax headache?

Q&A: Dominic Coyle

 

Myself and a parent are considering buying a property for me to live in. We would both contribute cash to the purchase, and hence no mortgage.

It is likely the property would be sold in some years, and the purchase price (plus any potential profit) would be returned to myself and my parent on the percentage basis we contributed.

What are the tax implications of this?

Ms C.McE., email

I suppose we might as well get the easy part of this out of the way first. There is nothing to stop two people buying a property together. In fact, there is nothing to stop more than two people buying a property together as long as the lenders are happy with the arrangement and agree to loan the funds.

In your circumstances, where no mortgage will be involved, there is no reason why the purchase price cannot come out of entirely separate accounts as long as it matches the agreed purchase price. There is nothing that says it must nominally come out of one account.

When you think of it, couples or even friends quite often buy a home together as it is a way for them to get the sums to add up when buying alone might not be an option.

Sometimes these arrangements work out, and sometimes they don’t, often with great stress for the person who does not want to move and/or sell up. But there’s nothing intrinsically wrong with the concept and lenders – where they are required – are very familiar in dealing with multiple buyers , related or unrelated.

So there’s no reason why a parent cannot buy a home with a child, with both names on the title deed as long as they have the cash between them to do so. And where there will be a mortgage, it is not an issue either: all the mortgage lender wants to know is that the buyers have the financial muscle to be able to service the loan and, where they can’t, that there is clear access to title for the lender as security.

Where there’s a mortgage

There are, however, a couple of things you want to be clear about.

I’m conscious it does not apply to you and your parent as you are talking about making this purchase with cash and don’t therefore have to worry about a mortgage. But few homebuyers will find themselves in that position so it is worth walking through what the mortgage situation would be.

In a scenario like yours where a parent was considering buying with an adult child, the temptation for any lender is to try to get the more secure earner to effectively underwrite or go guarantor on the loan.

If things go wrong, that could be very unfair on the parent – almost certainly the person the bank will have sought such a guarantee from and any legal adviser would sensibly urge them not to get involved in a mortgage contract on that basis.

A bank would not try such a thing with two friends buying a home together: there is no reason they should force such an arrangement on related purchasers across generational lines.

And you will likely be dealing with the one mortgage provider. While there is nothing in law to stop each buyer arranging their own mortgage to cover the portion of the property they will own, a key part of the arrangement for the lender is the security they have over the asset.

If multiple lenders have security of different shares in the property, it has the potential to get messy, and expensive should they need to assert that security down the line. Understandably, most will simply choose not to get involved on that basis. So you are most likely dealing with one lender.

Ownership

That brings me to the nature of the ownership arrangement. You need to decide before you start whether you will be tenants in common or joint tenants on this home.

What’s that, I hear you say. Gobbledygook though it sounds, it is fairly straightforward to explain, and important.

Joint tenants own an asset together. Each is a full partner, a 100 per cent owner. What this means is that if one of the joint tenants dies, the asset automatically (and that is the important thing) passes to the surviving joint owner or joint owners.

If you are tenants in common, it is an altogether more formalised arrangement. Each of you own a share of the asset and, should either one of you die, that share passes to their estate and is dealt with under the terms of their will (if they have one) or under the rules of intestacy if they don’t.

And there is nothing to say, the split has to be 50/50. Tenants in common can hold any share in a property from 1-99 per cent.

Any contract drawn up between you to govern this purchase should make expressly clear which of the two arrangements applies. I’m conscious you are looking at an arrangement you expect to last only a short number of years but things can happen unexpectedly in that time.

That’s also why both of you should ensure that you have a will drawn up – or if one is already in place, that it does not need updating to reflect the plans the two of you would have if one died during the period of ownership.

Tax

On a more straightforward note, the tax position of yourself and your parent is significantly different in relation to this property.

For you, it is a home, your principal private residence. This means that you will not face any tax – apart from local property tax – during your ownership of the property and nor will you be liable to capital gains when you sell, hopefully at a profit.

For your parent, the position is not so straightforward. This is not their home and therefore they cannot avail of the tax exemption. It is an investment property and they will be liable to capital gains tax on the full amount of any gain in price from the time of its purchase to its sale.

Similarly, while you will be able to avail of rent-a-room relief up to €14,000 if you were to bring in someone to live in the property during your time in the house, an investor does not have a similar benefit. If you do rent out a room, your parent will have to treat any share of that income to which they are entitled under your agreement as rental income and will be fully liable to income tax, etc, on it.

They will also be expected to register the property with the Residential Tenancies Board in that event.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into

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