Home ownership structure is critical

An increasing number of young people are entering the housing market by buying jointly with a friend or relative. Families banding together to buy a cottage or rental property has become another trend.

Statistics Canada reported that 70,000 young adults bought homes with a friend, sibling, parent or other family member during 2006, a movement likely to continue as house prices stay high.

But while joint real-estate ownership can be highly successful, it can also be as treacherous as teaching a friend or family member how to drive a car. According to Investors Group financial planner Murray Pituley of Regina, the difficulty comes in separating the personal relationship from the financial one.

He said many co-owners don't consider possible twists in life.

"What if one of them dies; what if one of them gets married; what if one of them takes a job transfer and moves out of province? You have to set out in advance what those what-ifs could be and try to document them into a co-ownership agreement. It could be a simple thing like who pays for some of the expenses.

"The best dollars on professional fees are spent up front to get things structured properly . . . sooner or later, things are going to have to unravel."

Pituley said ownership structure is critical.

He said parents might have their name on the title and mortgage, but claim a child is the beneficial owner and entitled to the principal residence exemption. However, Canada Revenue Agency might argue that the parents bought the house to "flip" it and the children were little more than maintenance people, in which case the parents would have to pay capital gains.

"That's where the legal advice comes into play. You can get similar-sounding situations with different tax results."

In recent years there has been a rush to get into real estate, with a sense that prices will always climb.

"If I were a parent helping a child get into real estate, I would be looking at where the market is at. Where did it come from and where is it expected to go? If you bought at the top end and you've got a high percentage of the purchase price mortgaged and the real-estate price drops, it's something to be concerned about."

He cautioned parents to step back and remember their own needs first.

"What happens if a child goes bankrupt or has a marriage breakdown or the parent wants a little extra to go on a holiday or buy a car?"

How hands-on does a parent want to be, or need to be in the event of an overflowing toilet at midnight?

Getting involved in the purchase of a house for a child working or going to school in another city presents other problems.

"Sometimes it's tough to separate business from family. If you have concerns about a child in advance, you probably shouldn't go in and help them out with a house in the first place."

As for buying a cottage or rental property with friends, many articles suggest it be done through a corporation to reduce taxes.

"A corporation can't have a principal residence," Pituley said. "A corporation would make sense if it's a real-estate development and a business."

The annual legal and accounting corporation costs might outweigh tax benefits.

(prepared by Ray Turchansky, Canwest News Service; Edmonton Journal)