It would be nice to think buying and selling property within a family would be easier, quicker and simpler than transferring real estate between strangers. But the reality is property arrangements between family members can get complicated quite quickly. They can also get complicated down the track, if you don’t take care with the details from the outset.
Don’t forget the emotional aspect too. Heightened feelings very often lurk just under the surface of any property deal, and they can easily create unexpected or unintended waves within the comfortable confines of a family arrangement. The bottom line is, don’t expect family property deals to go any more smoothly than deals between strangers, make sure you do plenty of preparation and research, and ensure the all-important i’s are dotted and t’s are crossed when engaging in property deals with family members.
Here are few typical scenarios, with some more specific details for each:
Can you sell your house to a family member below market value?
There are various situations in which the idea may arise to sell property between family members, such as parents downsizing and selling the family home to adult children, or one branch of the family purchasing a previously-shared holiday home from the rest.
One of the best ways to purchase a property at a value lower than the market value is set out below.
🏠 You’ll need to start by evaluating the market value of the property. You can do this yourself by researching other comparable properties in the area, but it’s better done by either a real estate agent appraisal or by registered valuation. The valuation will potentially be more thorough and impartial, but will cost up to $1000, whereas the real estate agent appraisal is usually free. Be honest with the real estate agent about your situation though, rather than wasting their time. A good agent will be happy to help you out without any obligation if they have the time.
🏠 Once a reduced sale price is agreed on between the parties, you’ll need to ask a solicitor to draw up a sale and purchase agreement for you. (There’ll be no need to engage a real estate agent beyond the appraisal, because the selling and purchasing parties are already decided on.) A sale and purchase agreement is a legal document which is required for every property conveyancing arrangement in New Zealand, even for a private sale or a sale to a family member. Make sure you always read and understand any legal documents before signing them.
🏠 The sale and purchase agreement will be drawn up indicating that the purchaser will pay the full market value for the property. The value of the difference between full market value and the agreed reduced sale price will be treated as ‘gift equity’ or ‘loan equity'. The reason for not listing the sale price as the lower price is because the bank or mortgage lender will consider the value of the property to be the full market value, rather than the agreed price, and using this gift or loan equity strategy makes the transaction more transparent while giving the purchasers more flexibility to access the equity in the asset. Mortgage lenders will also view the arrangement as lower risk because there is more equity in the property, which in itself has greater benefits.
🏠 If the difference between the market value and agreed sale price is treated as loan equity, a deed of acknowledgment of debt can be drawn up by your solicitor. It will record the fact that no interest is due and no repayments are expected until the house is sold. This is a better way to future proof the situation if the vendor or original owners will continue to have any vested interest in the property, despite the ownership transfer.
Are you helping the kids out?
Parents assisting their children to buy their own homes or properties is a time-honoured tradition, but one which can get a bit sticky if not handled well.
A little like the potential awkwardness around prenuptial agreements, if you intend to give financial assistance to a child who’s in a relationship with another person, you need to consider the consequence of them splitting up in the future. While this is not a nice thing to contemplate when looking through those rose-coloured glasses into the future, plenty of added heartache could be avoided down the track by ensuring the arrangement is clear and recorded.
In legal terms, in the absence of any evidence to the contrary, arrangements between parents and their children and partners are always assumed to be gifts. If your arrangement is intended to be a loan rather than a gift, this should be clearly recorded. Otherwise, an ex-partner may have a legitimate claim on a share of the property if the agreement is not clear that the financial assistance was a loan, not a gift.
Consider whether the money you are lending to children is a gift or a loan, whether there is any interest payable, the intended date of repayment, whether you expect a share of the value of the home, what might happen if you need or want your money back, and what might happen if the recipients’ relationship breaks down.
Make sure all parties agree, and that you record everything in writing. You may or may not want to have independent legal advice also.
Even if the relationship between the couple lasts, there could be unforeseen disagreements between yourselves in the future, or other offspring may complicate matters, so don’t be tempted to skip on the preparation or cut any corners at the start.
When the property is sold, there may be tax payable on your share, so this is something you could ascertain from your accountant or tax agent, or look for advice on sorted.org.nz
Another issue to be mindful of when gifting to children is the likelihood of any means-tested benefits for rest home care in the future. Monetary gifts can be viewed as a ‘deprival of assets’ and the government agency in question is allowed to ‘claw back’ the gift into an applicant’s asset pool. This could leave you in a position of needing to pay for your own care until the assets drop below the qualifying level for government assistance, so it may pay to take independent financial planning advice to ensure any property support you give your children today won’t jeopardise your security in the future.
Is it time to sell Mum and Dad’s house?
Many families end up in a situation like this - adult children are well and truly settled in their own homes, parents are not up to coping at home anymore and need to move elsewhere, or they pass on, and the job of packing up and selling the house is left to the children.
Start by talking to your parents’ lawyer. You’ll need to understand any estate structure such as a family trust, the title deed on the property, whether your parents’ wills are up to date and whether there is any power of attorney arrangement in place.
There are also anti money laundering laws in place now which require persons to be identified, which may be tricky if your parents are elderly and don’t own passports.
Next, get an idea of the current market value of the home, either by getting a registered valuation or by asking a local real estate agent for an appraisal. It’s super easy to get a range of real estate agents’ proposals by entering the property details on MyPitchList.
It’s a good idea to give yourself as much time as possible. Selling a property on behalf of others can be a lengthy process, so don’t rush it unless you absolutely have to. If the sale process also involves packing up family treasures, try to ascertain your parents’ wishes and don’t make any hasty decisions about disposal of their furniture or goods.
If there are more than a few family opinions in the mix, as there often can be, it’s also a good idea to be as thorough as possible, and to keep all lines of communication open so that relatives can share their views and feelings. This is often a stressful time for all the family, so if you’re the in the driving seat, try to stay mindful. Giving everyone a fair chance to have their say and helping to guide them to a general consensus will ease everyone’s burden, including your own. Sibling rivalry can come to the fore as parents enter their twilight years, and personalities can clash over major shifts like selling up the family home or helping parents move on to the next stage of their lives.
If your parents are still involved, be especially sensitive to their needs and emotions. The loss of independence that comes with age can be a major stressor for many seniors, so do what you can to ease the situation for them. Remember, they were instrumental in getting you where you are today, so it’s time now for you to return the favour.
To sum up…
Legal and tax issues are the main potential pitfalls involved with property sales between family members, and these usually crop up some time after the initial arrangement is put in place. Lawyers and financial experts may seem like an unnecessary financial burden at the outset, but in the long run their advice could prove invaluable. Likewise spending time and energy considering your unique situation, researching the topic and covering all likely scenarios may feel like a bit of a hardship at first, but is really the only way to minimise the likelihood of stressful or expensive problems down the track.