Should we buy a second house and let it to our son who is renting?

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SlugBreath

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We have cash sitting in various NTMA bonds and certificates plus some monies sitting in Prize Bonds. Earning very little and winning nothing.

We were thinking of buying a second home for about €400k here in Dublin, if we can find one. It would be for our son who is separated from his wife to live in.

He would have difficulty getting a mortgage for himself at the moment and is paying serious money in rent for an apartment plus paying the mortgage on his original home where his ex now lives.

We may or may not charge him a rent to live in this house.

Is this a good idea. (to buy house).

Should we charge him a rent (not needed) and if we don't will he be charged some sort of benefit in kind tax?

Our savings would be dramatically reduced.....but we don't need a lot of money to live off. We are just turning 70 years old ourselves.
 
SlugBreath said:
Should we charge him a rent (not needed) and if we don't will he be charged some sort of benefit in kind tax?
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The fair market rent that he doesn't pay will be considered a gift in kind and, as such, assessable for Capital Acquisitions Tax ("Gift Tax"). The first €3k of any gifts from each of you in any tax year would be exempt.

Gift and Inheritance Tax (Capital Acquisitions Tax – CAT)

This page gives a general overview on CAT implications on gifts and inheritence.
www.revenue.ie www.revenue.ie
 
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ClubMan said:
The fair market rent that he doesn't pay will be considered a gift in kind
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I'm just wondering how the fair market rent is calculated.

If there are other similar houses on the road rented out does this set some set of benchmark and how would we find out this information.

On the road where we live there are all different styles and types of property all paying different Property Tax and it has been very difficult to gauge what is the correct amount to pay, so trying to find out the rental income on a property, I would imagine would be similar.

The €6k gift tax exemption is interesting though and could be incorporated in to the sums.
 
SlugBreath you and I are of similar age and no doubt were through the mill in surviving the recessions of 50's, 60's, 70's, 80's and the "doddle" recessions since. You don't need the problems of your son (although naturally you are concerned). There may/may-not be grandchildren involved too along with other sons/daughters.

But, you still have your hard earned dosh and wonder if you should spend the lot on a 2nd house specifically for your son. If you do, you'll leave yourself exposed to every market/interest-rate-hike/cost-of-living/inflation hiccup that Ireland will throw up. Even changing your car will become a more daunting decision. You're 70 and now you are more aware of your mortality where your kid(s) will inherit your estate anyway. You've made it this far; ensure you stay around for as long as possible.

You need the stress of buying and running a second house inclusive of cost, expenses, fees, taxes, utilities etc like I need another heart attack. I'd advise your and Mrs SlugBreath to take a step back and consider your own future. This is the least to which you are entitled. If you were 50 years old, my advice would be the same.
 
I think there are two salient points:

- Your son is in trouble and you want to help; that’s great, he’s lucky to have you

- It’s important that you don’t jeopardise your own position and that your retirement is funded

Personally, I’d buy the house.

Then you need to work out the market rent for something like that. Let’s say it’s €2,000 a month. Because what’s proposed isn’t an arms-length transaction and because it’s not a landlord/tenant relationship in the strictest sense, for tax purposes you can apply what’s called a “caretaker discount”, i.e. the value to you of having him look after your otherwise idle property. That’s typically 25-40%, so let’s push the envelope and say 40%.

So we’re at €14,400 per year (i.e. 60%). Take the €6,000 off that, i.e. Small Gift Exemptions x 2. So you’re at €8,400.

Then perhaps do you just charge him €8,400 in rent. For me, that depends on a) whether you want to, and b) what your marginal tax rate is. If the latter is low, i.e. 0% or 20%, I’d charge him that. He’s paying rent anyway, so that’s not a big deal.

You just need to be careful that the tenancy doesn’t get deemed a “real one”, which it shouldn’t, with a view to avoiding being tied to a low rent number.

If it’s acrimonious, perhaps there’s merit in him paying higher rent with a view to making his situation look worse rather than better? But that’s beyond my pay grade.
 
The caretaker discount in this case sounds suspiciously like potential tax avoidance that Revenue would frown upon and not allow. I'd get expert advice on it if you do intend to pursue it.
 

No 39 of 1997, Section 639, Revenue Tax Briefing

No 39 of 1997, Section 639, Revenue Tax Briefing
www.charteredaccountants.ie

The plan would be that our son moves in to the property and maintains it and pays all the utility bills etc. He would pay us an agreed low rent, similar to that outlined by Clubman and Gordon above, incorporating the €6k gift allowance.

We would have no problem if down the road, after his separation comes through from his ex, that he could apply for a mortgage and purchase the house from us.

Could this plan work?
 
SlugBreath said:

No 39 of 1997, Section 639, Revenue Tax Briefing

No 39 of 1997, Section 639, Revenue Tax Briefing
www.charteredaccountants.ie

The plan would be that our son moves in to the property and maintains it and pays all the utility bills etc. He would pay us an agreed low rent, similar to that outlined by Clubman and Gordon above, incorporating the €6k gift allowance.

We would have no problem if down the road, after his separation comes through from his ex, that he could apply for a mortgage and purchase the house from us.

Could this plan work?
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The plan could work, but there are so many obstacles and potential obstacles in your way I feel you're biting off a bit more than you may be able to chew. But, I'm saying this with little or no information e.g. have you other married siblings? They may have no marriage difficulties now, but nobody can tell the future. Such deals can cause acrimony within your household too. As somebody on this forum recently said Think Thrice, Measure Twice and Cut Once.

For the record:- I hope I am wrong in my advice.
 
Leper said:
SlugBreath you and I are of similar age and no doubt were through the mill in surviving the recessions of 50's, 60's, 70's, 80's and the "doddle" recessions since. You don't need the problems of your son (although naturally you are concerned). There may/may-not be grandchildren involved too along with other sons/daughters.

But, you still have your hard earned dosh and wonder if you should spend the lot on a 2nd house specifically for your son. If you do, you'll leave yourself exposed to every market/interest-rate-hike/cost-of-living/inflation hiccup that Ireland will throw up. Even changing your car will become a more daunting decision. You're 70 and now you are more aware of your mortality where your kid(s) will inherit your estate anyway. You've made it this far; ensure you stay around for as long as possible.

You need the stress of buying and running a second house inclusive of cost, expenses, fees, taxes, utilities etc like I need another heart attack. I'd advise your and Mrs SlugBreath to take a step back and consider your own future. This is the least to which you are entitled. If you were 50 years old, my advice would be the same.
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I totally agree with this.
You're being very thoughtful and generous in considering this plan but you also need to consider (I would go further and say prioritise) your own needs - both now and in the future as you grow older.

Even ignoring your son's situation, does concentrating practically all of your wealth in a single market/asset class (domestic Irish property - your own home and a second "rental" property) make sense?
I would argue that it probably does not.

Would allowing him to live in a granny flat style arrangement in your own home be an option?
Not ideal but nothing is in this situation.
 
Leper said:
The plan could work, but there are so many obstacles and potential obstacles in your way I feel you're biting off a bit more than you may be able to chew.
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ClubMan said:
You're being very thoughtful and generous in considering this plan but you also need to consider (I would go further and say prioritise) your own needs - both now and in the future as you grow older.
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We would still have about €200k in savings plus a small private pension and state pensions to see us through. We live frugally but enjoy our holidays.
We have two other children. Both doing O.K. Each will benefit one third in our will.

If our son was to get a loan down the road and buy the house from us then we would have our money back. If not, then the second house would form part of our will. There would be enough money from the sale of our main house for our son to come to a financial arrangement with his siblings to buy the second house from his third share of the inheritance. He is in good employment, on a good salary but caught up in the trap of rent plus maintenance plus mortgage on his original home. His rent is circa €25k per annum. This would be reduced to circa €8k under the caretakers agreement....giving him time to accumulate savings.

Initially our son did live with us (plenty of room) but it was not an ideal arrangement for him.
 
Gordon Gekko said:
Then you need to work out the market rent for something like that. Let’s say it’s €2,000 a month. Because what’s proposed isn’t an arms-length transaction and because it’s not a landlord/tenant relationship in the strictest sense, for tax purposes you can apply what’s called a “caretaker discount”, i.e. the value to you of having him look after your otherwise idle property. That’s typically 25-40%, so let’s push the envelope and say 40%.

So we’re at €14,400 per year (i.e. 60%). Take the €6,000 off that, i.e. Small Gift Exemptions x 2. So you’re at €8,400.

Then perhaps do you just charge him €8,400 in rent. For me, that depends on a) whether you want to, and b) what your marginal tax rate is. If the latter is low, i.e. 0% or 20%, I’d charge him that. He’s paying rent anyway, so that’s not a big deal.
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+1
Gordon Gekko said:
You just need to be careful that the tenancy doesn’t get deemed a “real one”, which it shouldn’t, with a view to avoiding being tied to a low rent number.
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IANAL but I suspect some form of licence agreement rather than a tenancy per se may be appropriate here.
ClubMan said:
The caretaker discount in this case sounds suspiciously like potential tax avoidance that Revenue would frown upon and not allow. I'd get expert advice on it if you do intend to pursue it.
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As there is no suggestion that the situation is contrived to generate an artificial tax advantage, I think this risk is low. But caveat emptor all the same and an investment in proper professional advice is likely to be money well spent.
 
I'm no great Tax Advisor and neither am I renowned as a Legal Eagle. Your son and spouse are in separation at the moment. Likely divorce will follow at some time. Separation and Divorce are not the same thing. If the divorce is to be contested it can get very dirty and few can predict what will happen in settlement. Have no doubt, Revenue will be interested in any financial matters between you and your son and they are good at what they do.

Divorce will have both parties disclosing all financial assets and probably on several occasions before settlement.
 
Hi OP,
Having read this thread, if it were me, I would not risk what you have built up and buy the house. The downside risk & hassle would just not be worth it. Rather, I would just help your son with his rent.

Firefly.
 
First, look at your own personal financial circumstances, can you afford to say goodbye to that €400k, for ever more?

If the answer is yes, then, see below...if the answer is no, then forget the idea right now.

Next, do you have other children to consider, and if so, is it equitable to give this son €400k (as a gift, an advance on his inherritance etc).?

If the answer is yes, then, see below...if the answer is no, then forget the idea right now.

Is it wise to be trying to buy a property in the Dublin market, at a time when valuations are almost at an all time high, and there's an arguement for house prices dropping in a couple of years time (as a consequence of expected interest rate rises, more houses being built etc)?

If the answer is yes, then, see below...if the answer is no, then forget the idea right now.

Is there even the slightest chance that his ex, might come back and try to get a share of this new property, through the court system? Stranger things have happened, so get the professional opinion of a good family law solicitor / barrister, on this one, regardless of what anyone says has been agreed etc.

Finally, why would you not charge him a rent, or get him to borrow part of the cost of buying the property (with you possibly helping him with the remainder, regardless of the specific figures) ? No offence intended, but we all have a greater appreciation for things, when we have to pay for them etc.
 
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