Selling your home to your kids—for $1

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Q: I want to pass my principal residence where my son and I live to my son at the lowest cost possible. Should I sell it to him for $1 now, will it to him, or proceed differently? Does land transfer tax apply in all cases? What about probate fees? —Carol A: Assuming you don’t own any other real estate and haven’t during the period you’ve owned your home, Carol, it sounds like it may qualify as your principal residence. A principal residence is tax-free for capital gains tax purposes upon sale or upon death. In this regard, anything you do to transfer it to your son now will be income tax-free, but it would also be tax-free later.

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Given your son also lives in the property, if he owned it while you both lived there, and he owned no other real estate, it too could be his tax-free principal residence. I want to address the suggested sale price to him of $1, Carol, for the benefit of others more than you. As mentioned, given the property could be either of your principal residences, as you both live there, the $1 sale won’t save, minimize, or defer capital gains tax, as none will apply. But the $1 sale price idea is one I hear a lot, so others must also think you can use an artificially low price to somehow save tax. Generally, when you transfer a capital asset between family members, who are not dealing with each other at arm’s length, the transfer is deemed to take place at market value for capital gains tax purposes. You can’t use an artificially low number to change the tax treatment. Beyond income tax, there are other taxes and fees on real estate, Carol. Land transfer tax applies when real estate is transferred for value. So, if you did an outright gift of your home to your son, there may be no land transfer tax. That would be the case in the province of Ontario, for example. Given land transfer tax can apply at the municipal and provincial levels, I won’t speculate about whether this is universal across the country. If you sold the home to your son for some sort of value, or took back a mortgage, or you willed it to him on your death, land transfer tax should apply. For perspective, land transfer tax in Ontario is $16,475 on a $1,000,000 home. In the city of Toronto, it’s double – $32,950. Different provinces and municipalities across Canada charge different land transfer tax rates. On death, there are probate fees that apply to any assets that pass through your estate. Probate fees validate your will so that your executor can distribute your assets. Some provinces and territories have small, flat fees, while others, like Ontario, charge 0.5% on the first $50,000 and 1.5% on the excess. A $1 million home in Toronto, if it were the only asset in an estate, would require $14,500 of probate fees to distribute. Some people will add children to the title on their home to try to avoid these probate fees. If their children don’t live with them, it can open the property up to capital gains tax. That’s not the case with you. So, at most, Carol, it sounds like you could avoid land transfer tax or probate fees with a transfer strategy during your lifetime. To me, the bigger question is, should you? If you transfer your home to your son now, he owns it. It doesn’t belong to you anymore. And even though you obviously trust him, what if that changes? What if he decides he doesn’t want to live with his mother in the future? What if he gets married? Sued? Becomes disabled? Dies? I think it’s risky and you need to consider if the savings for him are worth the risk to you. There are options like an alter ego trust, if you’re over the age of 65, that could expedite the transfer of your home on your death, Carol, while simultaneously saving some of these costs in the future. But a trust would cost you legal fees to establish and may have ongoing administrative costs. Unless you had a significant estate, this may not be a viable strategy. So, I don’t want to rule out taking some sort of action now. I just haven’t heard any good reason in your case to do anything differently than what you’re doing. And for what it’s worth, I usually talk parents out of doing what you’re thinking about doing because it’s usually not beneficial in the first place. It’s great to want to help your kids. But I would always advise parents to avoid doing it at their own risk or peril. Ask a Planner: Leave your question for Jason Heath » Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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Comments Cancel reply

Haiqing Hua says:

September 8, 2020 at 4:35 pm

I am providing elderly services so I am interested in this topic. I am also a realtor myself, I want to work with you to help the elderly to transfer their house to their kids. I think this is a good idea.

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Graham says:

September 21, 2020 at 7:35 pm

A scenario we are thinking of is ‘selling’ our principal residence to our 3 children. We use the proceeds to build a vacation home that they will eventually inherit. When they buy our home it will not be a principal residence for any of the three kids, they all have homes, it becomes an investment for them that will be rented. We will become renters until the vacation home is built and beyond?. The house is worth just over $600,000. We only need $450-500,000 max to build and would be willing to sell it to all 3 kids for that price. Does this sound ‘workable’ Can we choose this lower price without any tax implications.

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JIM W MATHESON says:

September 29, 2020 at 7:37 am

If I trade houses with someone in Ontario, does land transfer tax apply if it is an even trade? If there was a difference in value, as determined by appraisals, would land transfer tax be payable on the entire property values or just the difference in value?

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1. Sandra E. Martin says:
  
  September 30, 2020 at 3:29 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Millie says:

November 17, 2020 at 5:17 pm

In 2006 my husband who is a self-taught carpenter built his own secondary residence in Alberta where our son started a new job. Our primary residence is in Newfoundland. Our son has lived in the house from 2006-2020 and we spend some time there together as a family. Our son lost his job and has to move so we plan to sell the house. What if any are the tax implications of this sale? Should we have kept all our receipts from 15 years ago? We still have our primary residence in Newfoundland.

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1. MoneySense Editors says:
  
  November 19, 2020 at 8:17 am
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Lynn says:

November 22, 2020 at 12:40 pm

What are your thoughts on a quitclam deed? Specifically, what would be the advantages/disadvantages to kids as it relates to tax implications and if there is an exhisting mortgage?

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1. MoneySense Editors says:
  
  November 25, 2020 at 7:14 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Saj Rickmore says:

December 19, 2020 at 9:04 am

This was fantastic advice – I hope she listened. I know people that have had their hard earned home ripped from under them by their “loving” children. And this could easily happen in a messy divorce for an adult child you have gifted your home to. Solid advice. I love my kids to the ends of the earth, but I would never take this risk.

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Fariba Hatami says:

January 4, 2021 at 12:49 pm

Hello,

I purchased a house in 1989 for $ 235 k in 1994-1995 I lost my job and my parents paid the mortgage (160 k)and the house was changed to their name.
I renovated their primary resident and I paid them over 90 k in cash. We can sign an affidavit in that regards, my parents did not make any interest in the money and I paid them by year 2000.
They willed the house to me since it was my house originally, they live in Sudbury which is their primary resident, the house in Sudbury and $ 256k is willed to my brother and the house in Toronto which I lived for the past 32 years and the Cottage
In Sudbury is willed to me. I lost over 75 k when my parents paid and took over my house, I also paid the taxes, maintenance and the utilities for the past 32 years. My parents and I would like to transfer the house to me now since I paid the loan in year 2000. Can a lawyer prepare a declaration that both my parents and I sign and I will pay the capital Gains for the 5 years ( 1989 – 2000) and we transfer the house to my name?. If I do not do this now ;when my parents pass away, I will have to sell my house to pay the government the capital gains, after paying the capital gains I will not be able to buy a house as the prices are very high in Toronto.

Please let me know what I can do.

Thank you,

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1. MoneySense Editors says:
  
  January 11, 2021 at 3:26 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Mary Earle says:

January 8, 2021 at 12:10 am

We are seniors with a principal residence. We have a second property in Ontario which is occupied by our son and his family. There is no mortgage on 2nd property and son pays all bills. No rent is charged.
Our question: If we transferred the property to our son, for mominal fee as he provided funds at time of purchase, would this have tax consequences for us the original owners at transfer or later on if our son decides to sell said property? Thank you for your response.

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1. MoneySense Editors says:
  
  January 11, 2021 at 3:14 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Gordon Goldrich says:

May 7, 2021 at 2:47 pm

Sometime ago my wife and I added our two children as joint tenants to our primary residence. We were given to understand that, by so doing, the ownership of the property would automatically transfer to them on our death and no capital gains tax would apply to the ultimate sale of the property by our children.
Is this correct.

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1. MoneySense Editors says:
  
  May 7, 2021 at 3:55 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
  
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Annie Fedak says:

June 19, 2021 at 4:19 pm

I was wondering what the process is when I’m renting to my son what used to be my primary residence. It has been his primary residence ever since I bought another house. He has been paying off the balance of the mortgage payments and a small amount of rent since it’s been paid off as of last year.
How would I transfer the house into his name without paying capital gains, as I unofficially sold it to him?

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1. Courtney Reilly-Larke says:
  
  June 30, 2021 at 5:24 pm
  
  Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with a qualified advisor.
  
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Jeanette Evans says:

January 12, 2022 at 5:31 pm

The question was asked:
Should I sell it to him for $1 now, will it to him, or proceed differently?
These are 3 different options.

The answer (oddly) ends:
I just haven’t heard any good reason in your case to do anything differently than what you’re doing.

What does he think she is doing? She is asking what to do! If he thinks none of these is an option, ie do not transfer the house, the answer is written incorrectly.

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