The article “Selling Your Home To Your Kids – For $1” was originally published on MoneySense on November 20, 2018.

You need to consider if the savings for your child are worth the risk to you

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.

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.

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.

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.