Helping the kids buy a home

Helping the kids buy a home requires a bit of figuring.
Cashing in RSPs is an ugly way to do it because of the tax burden, planner says.

Fiona Anderson
Vancouver Sun
Friday, May 18, 2007
CREDIT: Ian Smith, Vancouver Sun

Kent Curley is retired and enjoying the good life which includes plenty of gardening but would also like to help his son buy into the housing market.
Kent Curley figures he's a typical retired dad. He's got a good pension, his house is mortgage-free and he's got some savings to boot. Now what he'd really like to do besides putter in the garden and on the golf course is help his son buy a home.

Curley's son has two young children of his own and while he has a steady job and is pre-approved for a mortgage, he doesn't have enough for a down payment to get into the Lower Mainland's sizzling real estate market. And with prices rising as they are, Curley figures a lot of retired parents are in the same situation he is, comfortably retired yet watching their children struggle.
"You want to be able to help them," Curley said.
But at the same time, Curley wants to make sure he helps in a way that doesn't hurt himself.
"I don't need that money," Curley said. "I would like to use it but I don't want to incur a lot of penalty. And I want to be able to leave something."

Adrian Mastracci, portfolio manager with KCM Wealth Management, says helping children financially is one of the top concerns of his retired clients, whether it's to help them buy a house, start a business or just get out of debt.
With people living longer "it's a question that's on the minds of many," Mastracci said. "How can I help them now as opposed to waiting 30 years?"

The Vancouver Sun set Curley up with certified financial planner Michael Thorne of North Vancouver. As a planner certified by the Financial Standards Planning Council, Thorne has training in all aspects of personal finance, including investing, estate planning, tax and insurance.
Thorne called it a no-brainer for flush parents to help out their kids.
"But when it gets down to the nuts and bolts on how to do it, it gets interesting," Thorne said
The best source of money is cash in the bank because it wouldn't trigger any tax consequences, Thorne said.
But that's not an option in Curley's case. His three choices are taking money out of his registered retirement savings plan, taking money out of his non-registered account or using the equity in his house, Thorne said.

Taking money out of an RSP is "an ugly way to do it" because the tax could be as much as 43.7 per cent, the top tax rate in B.C. So to provide a $100,000 gift to his son, Curley would have to withdraw about $175,000, which could seriously deplete his RSP.

The increase in income for the year the money is withdrawn could also lead to other consequences, like a clawback of Curley's old age pension, Thorne said. "So taking it out of an RSP is not the way to go," Thorne said.
If Curley has sufficient money in a non-registered account, he may want to consider using that instead, though it too would have tax consequences. While the money would not be considered income, it would trigger capital gains tax if the investments have increased in value. Only 50 per cent of gains are subject to tax, but that could still be a big chunk of change if the securities have gone up significantly, which is often the case when they have been held for a long time.

Mutual funds may also be have deferred sales charges or other fees that have to be paid when they are redeemed.
So again, more than $100,000 would likely have to be withdrawn to yield an equivalent down payment, although how much more would depend on the particular holdings.
A third alternative is using the equity in Curley's house, either by remortgaging or taking out a line of credit secured by the house, Thorne said. Money could then be taken out of the RSP or the non-registered investments as needed to make the principal payments with the son paying the interest.

Mandy Wu, a portfolio manager with RBC Dominion Securities and a chartered accountant, says Curley should sit down with an accountant to actually crunch the numbers to determine which suits his needs best. He should also talk to his investment adviser about the upside of the investments he currently holds to ensure he sells the ones that are likely to underperform. And after he determines what to do, he has to make sure he rebalances his portfolio so that he's properly diversified, Wu said.

And all that is just to determine where the money should come from. Curley then may want to think about how to give the money, whether as a gift, a loan or perhaps through a co-ownership agreement on a house, Thorne said. And then see a lawyer to put the necessary paperwork in place.
So while it seems like a "no-brainer" to want to help your children, how to do it can get complicated.

Market Update

April housing sales pick up, listing activity swells

Vancouver, B.C. May 2, 2007

The Real Estate Board of Greater Vancouver (REBGV) reports that total residential sales for detached, attached and apartment properties reached 3,387 units in April 2007, an increase of 1.3 per cent when compared to the 3,345 units sold in April 2006 and a decrease of 16.2 per cent when compared to the 4,043 sales in April 2005.

New listings for detached, attached and apartment properties increased by 25.3 per cent to 5,580 units compared to the 4,452 units listed in April 2006. The total number of active listings increased by 25.8 per cent to 11,347 units when compared to April 2006’s 9,022 units.

“So far, the constants our market has experienced over the past five years are holding strong in 2007. We’re still in one of the best markets real estate has ever had in Greater Vancouver. Sales are higher than historical norms and homes are selling very quickly, usually with multiple-offers,” says REBGV president Brian Naphtali. “Last month, the average days a property spent on market dropped again, down to 39 days, compared to 43 days in March, 49 days in February, and 56 days in January.

“There were a couple of surprises in April’s market, particularly in attached housing sales throughout Greater Vancouver. Consumers buying townhomes in Richmond and Burnaby are clearly finding great value for their doloar as sales activity in those two cities came within a few units of breaking records,” explains Naphtali. “We also saw a significant increase in both new listings and active listings inventory. To get a better idea of what sort of properties are now available in your community, set up a meeting with your local REALTOR®.”

According to Multiple Listings Service® (MLS®) data, sales of apartment properties decreased by 1.2 per cent to 1,350 sales in April 2007 compared to 1,366 sales in April 2006. The benchmark price of an apartment property in Greater Vancouver, calculated by the MLSLink® Housing Price Index, is $355,108, up 14.7 per cent from one year ago.

Sales of attached properties increased by 17.6 per cent in April 2007 to 634 sales, compared to 539 sales in April 2006. The benchmark price of an attached unit is $432,490, up 13.8 per cent from a year ago. Sales of detached properties decreased by 2.6 per cent in April 2007 to 1,403 sales, compared to 1,440 sales in April 2006. The benchmark price of a detached unit is $695,069, up 11.9 per cent from last year.

Recreational Property

Luxury recreational property sales are set to soar in coming months as affluent baby boomers drive demand for upscale product from coast-to-coast, according to a report released today by RE/MAX. The 2007 RE/MAX Recreational Property Report found the top-end of the market stands to gain most from the aging baby boom demographic, as many prepare for their retirement years.

Teardowns, custom-builds, and renovation continue unabated as a result, changing the shoreline of lakes and rivers in 34 of the 39 markets surveyed from Newfoundland/Labrador to British Columbia. Upper-end sales have also affected recreational property values across the board, placing upward pressure on prices, particularly in Western Canada.

Starting prices have topped $500,000 in 31 per cent of recreational property markets. Only seven offer waterfront properties under the $250,000 price point. “Baby boomers are investing in the future – from both a lifestyle perspective and an economic standpoint,” says Elton Ash, Regional Director, RE/MAX of Western Canada. “Tremendous equity gains have been realized in recent years as demand for recreational properties across the country swells. Given the aging of the population, this trend is expected to continue for at least the next five to 10 years as baby boomers move through the cycle.”

Boomers -- born between 1946 and 1965 – currently represent about one-third of Canada’s population and control approximately 45 per cent of its wealth. They own $230 billion in real estate assets and have a net worth of $530 billion. While many boomers have retirement in mind, others are looking for a second home where they can spend quality time with their families and friends. Although the investment aspect is secondary, it still plays an important role in the decision to purchase a recreational property, be it a lakefront cottage, a hobby farm with acreage, or an oceanfront condominium. “It’s been said that money made in stocks and bonds typically works its way into real estate,” says Michael Polzler, Executive Vice President and Regional Director, RE/MAX Ontario-Atlantic Canada. “This year is a prime example, as economic performance and stock market profits have propped up activity in most Canadian markets. The boomer attitude is go big or stay home.”

While building the dream clearly appeals to a broad range of purchasers, realizing ownership is becoming increasingly difficult. Affordability is top-of-mind in many markets. Purchasers without the financial wherewithal to ante up are considering smaller lakes and riverfront properties, as well as timeshares and fractional ownership. Even land-leased properties are garnering attention. Atlantic Canada continues to offer up the best bang for the buck, with the Eastern Coastline, NL at $75,000, Greater Moncton Area, NB at $80,000, and South Shore, Lunenburg County, NS at $225,000. In Ontario, Parry Sound, Elliot Lake, and Combermere attract price-conscious buyers staring from $200,000, $150,000 and $190,000 respectively. In the West, great value can be found at Lake Winnipeg, MB from $200,000 as well as the Central South Cariboo in BC from $275,000.

The most expensive markets in the country, located in British Columbia, Alberta and Ontario, are as follows: Invermere starting at $2.5 million; Kelowna at $2 million; Salt Spring Island at $1.5 million; Whistler at $1.1 million; Sylvan Lake and Penticton at $1 million; North Okanagan/Shuswap at $900,000; Comox Valley – Mt. Washington and Fraser Valley (Cultus Lake, Harrison Lake) at $800,000; Wasaga Beachfront at $700,000; Midland at $550,000; Bala, Port Carling at $500,000 to $550,000; and Honey Harbour/Port Severn, Orillia/Lake Couchiching and Port Elgin/Kincardine/Goderich at $400,000. “Limited inventory levels have contributed to the upswing in starting prices in 54 per cent of recreational property markets this year,” says Ash. “Despite upward pressure, purchasers remain grounded when it comes to buying recreational properties. Very few purchasers are willing to spend more than fair market value.” Forty-six per cent of markets have seen exponential growth in recent years, thanks to an influx of purchasers from other parts of the country, as well as the U.S., Europe, and Australia. Canadian recreational property markets are considered undervalued and world-class – and as such, represent an incredible opportunity for international investors.

“Compared to similar properties in the U.S. and overseas, we are extremely competitive,” says Polzler. “In coveted recreational property areas throughout the U.S., waterfront prices in the double-digit million-dollar range are quite commonplace.” RE/MAX is Canada´s leading real estate organization with over 17,000 sales associates situated throughout its more than 638 independently owned and operated offices across the country.

The RE/MAX franchise network, now in its 34th year of consecutive growth, is a global real estate system operating in over 68 countries. More than 6,900 independently owned offices engage 121,000 member sales associates who lead the industry in professional designations, experience and production while providing real estate services in residential, commercial, referral, relocation and asset management.