What is a Gifted Down Payment?
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The high real estate prices in the Greater Vancouver Area and new mortgage rules designed to crackdown on risky lending have made it harder than ever for first-time home buyers to get into the market. The new Stress Test that came into effect in early 2018 means that many first-time home buyers who were previously approved for a high-ratio mortgage are now completely shut out of the market.
Desperate to move out of their parent’s homes and get into the housing market, cash-strapped millennials are accepting financial help from their parents in the form of gifted down payments. Did you know that financial gifts from parents have doubled since 2000? They are up from 7% in 2000 to 15% in 2016. At the same time, young adults still living at home with their parents is up 13.3% since 2001, and young adults living with a spouse or partner is down 14.6%.
If you’re in the fortunate position to help your children buy a home (and help yourself reclaim your home), you have a few options. One of them being to provide a gifted down payment.
What is a gifted down payment?
A gifted down payment, also known as a living inheritance, is a financial gift from the buyer’s immediate family member that will go towards the down payment. All that is required for documentation is a signed Gift Letter from the family member which states that the money does not have to be re-paid, and a snapshot of the child’s bank account showing that the gifted funds have been transferred.
Gifting money makes sense for tax reasons
As a baby boomer, you’re in the middle of an unprecedented wealth transfer of cash, property, and investment holdings. If you’re in the position to not need the money coming to you, then that windfall will just result in a big tax hit. However, if you were to gift it to your children, it is no longer a tax burden for you or them as there is no gift tax in Canada. In the long term, your children will pay less in estate tax when you pass away.
Of course, the best part of gifting your children money to buy a home will be when you see the fruits of your labour – a better start in life for your children and their young family.
Do you know a first-time home buyer looking to get into the local Port Coquitlam real estate market? Refer them to Milka Lukacevic of The Mortgage Centre TMK Team for mortgage pre-approval and real estate market guidance.