Buying house with parent, tax implications??

Hi,

I am looking at buying a house but I am having diffucility with morgage funding due to negative equity and issues selling my current home. An option is to keep my existing home and rent it and buy the new house with with my father as a co-owner. We would both put approx 40K into buying the new house with the remainder on a joint mortgage.

However we need to understand the tax implications. I would pay all monthy mortgage repayments. Would my father be liable for income taxes, etc. Also the idea would be in 5 years time to buy out my father by taking over the mortgage and repaying him the 40K. Are there any issues in doing this assuming an increase in the property value in 5 years.

Am grateful for all advice. Thank you.

There are certainly issues.

Could your father not lend you the €40k and go guarantor or the loan?

Otherwise there may be an exposure to CGT on the increase in value between now and the buy out (albeit the 7 year exemption). You would also have to finance 1/2 the increase if that was the agreement.

Joe_90 said:

There are certainly issues.

Could your father not lend you the €40k and go guarantor or the loan?

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I won't get the additional mortgage finance this way as I am already in NE.

What is the 7 year rule? Also would be father be liable for any income tax?

Thanks,

Property acquired before 31 December 2014 and held for 7 years will qualify for an exemption from CGT. http://www.pearse-trust.ie/blog/bid/103747/The-CGT-7-Year-Relief

If your father has a loan and you are residing in the property and paying down his loan then its rent in his hands.

Hard to argue that the payment of his loan is anything else.

Perhaps someone would enlighten me as to why a bank would not go for the father giving the son the €40k and going guarantor on the loan. Surely the security is the property that has €80k positive equity????

Joe_90 said:

Property acquired before 31 December 2014 and held for 7 years will qualify for an exemption from CGT. http://www.pearse-trust.ie/blog/bid/103747/The-CGT-7-Year-Relief

**Thanks for this.**

If your father has a loan and you are residing in the property and paying down his loan then its rent in his hands.

**So he would need to declare this an pay income tax?**

Perhaps someone would enlighten me as to why a bank would not go for the father giving the son the €40k and going guarantor on the loan. Surely the security is the property that has €80k positive equity????

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Originally I wanted to keep my existing property and rent it out but the bank only factor in 75% of the monthly rental income. They also stretch test the existing monthly mortgage repayments with an increased 2% interest rate. This means I can only borrow approx 100K keeping my existing property even putting a lot of equity into the new purchase.

Joe_90 said:

Perhaps someone would enlighten me as to why a bank would not go for the father giving the son the €40k and going guarantor on the loan. Surely the security is the property that has €80k positive equity????

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Hi Joe

It's very difficult for Irish mortgage lenders to enforce their security.

In particular, trying to enforce guarantees is so cumbersome and expensive, that banks seem to have given up on them.

If the father is a named borrower, he knows that he has borrowed the money and must repay it.

In addition repayment capacity is calculated on the income of the borrowers and excludes guarantors. A joint borrower is regarded as a primary counterparty to a loan and assumption is that he/she will be contributing to the loan repayments. A guarantor would be a secondary counterparty and generally does not contribute to loan repayments. This may not always work out in practise, but its' a reasonable rule of thumb and as per BB's post above frequently while being leagally liable for the borrowings the inferenec from a guarantor is that a guarantee is a type of reference rather than a legal contract!

Do you believe my father would be liable for income tax with me repaying to mortgage payments in full? This is probably key in whether this is an option or not. Thanks,

Let's step back for a minute.

He is buying with you 50:50, where will he derive a benefit from ie in 5 years time you say I'll buy you out.

The property is now worth say €300k and the loan is at €176,000 (having borrowed 200k)

So you take his half of the mortgage €88k and pay him €62k (a benefit of €22k) or perhaps you agree that you will pay down your share of the loan only and that his share remains at 100k, therefore you pay him 50k for his share, 10k subject to CGT.

Might need a declaration of trust or some formal written agreement but would get away from an exposure.

There should be no issue of income tax here as arrangement is between the 2 parties with no actual rent paid. Amounts described are well with the CAT thresholds and as this is meant to be a loan rather than a gift it should not raise any Revenue issue!

44brendan said:

There should be no issue of income tax here as arrangement is between the 2 parties with no actual rent paid. Amounts described are well with the CAT thresholds and as this is meant to be a loan rather than a gift it should not raise any Revenue issue!

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Brendan, if you and I both needed to move house for work, and decided to swap houses with each other for a couple of years, the absence of an actual payment of rent wouldn't mean that there wasn't actually a consideration in the nature of rent - I'd be renting your house from you and you'd be renting mine from me.

I'd suggest something similar could apply here - the mortgage payment by the son is effectively the rent he pays the father for the enjoyment of a property half owned by his father.

Respectfully I suggest that the illustration of the house swap is quite different in form from the OP's proposal. Both parties will be joint owners of the property and payment of the mortgage by one of the parties would not be in itself a quasi rent payment. The ultimate intention would be that the OP is buying back the interest his father is inputting to the property and this can quite easily be drawn up in a formal agreement.

44brendan said:

Respectfully I suggest that the illustration of the house swap is quite different in form from the OP's proposal. Both parties will be joint owners of the property and payment of the mortgage by one of the parties would not be in itself a quasi rent payment. The ultimate intention would be that the OP is buying back the interest his father is inputting to the property and this can quite easily be drawn up in a formal agreement.

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Well if it's formalised as the purchase of equity in the house and the agreement can stand up to scrutiny (i.e. would it need to be stamped for this purpose?), then that's what it is, but otherwise if the father retains his half share of the property, then the son paying his share of the mortgage can only be either:
1. A gift of money from the son to him (with him giving the son a gift equal to the value of the son's use of the house), or
2. As I described above a transaction equating to a rent.