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Protecting Parents’ Investments on Children’s Property
David H. Korman
November 16, 2023
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We were recently asked to do a seminar for a real estate brokerage to discuss the fact that parents often provide financial assistance to their adult children when they purchase a home. The question becomes whether it is possible to protect parents’ investments on their children’s property. The real question is whether the funds from the parents were in fact an investment. In other words, was the financial assistance a gift or a loan?
A gift is often supported by a gift letter to a first mortgage lender. There is no intention or requirement for the repayment of a gift. The gift becomes the property of the child. Therefore, if the financial assistance was factually a gift there is no protection for parents as it is not an investment.
On the other hand, if financial assistance was a loan there would be an intention and requirement for repayment on agreed upon terms. The loan would usually be evidenced by a promissory note and might even be secured by a first mortgage or by a second mortgage if permitted by the first mortgage lender. The terms of the loan could require regular principal and/or interest payments or those could be deferred until the sale of the property. Therefore, if the financial assistance was factually a loan there is protection for parents by enforcing the promissory note and/or mortgage provided as security.
Financial assistance from parents cannot be characterized as a gift and therefore part of the child’s downpayment in order for the child to qualify for a mortgage, and then later be demanded for repayment by the parents as a loan. The facts must be supported by proper legal documents. The financial assistance is either a gift or a loan, but it cannot be both.
If you or any of your clients are considering providing financial assistance to adult children for the purchase of a home, please do not hesitate to reach out to us at (905) 270-6660 or Info@kormans.ca first so that we can advise you accordingly.
David is a member of the Law Society of Ontario since his call to the bar in 1985. David has over 35 years of extensive experience as a lawyer in residential and commercial real estate transactions, commercial leasing, corporate and commercial transactions, and private and institutional lending. His client base includes individuals, business entrepreneurs, developers, financial institutions, brokerages, and real estate investment trusts.
David takes an amiable and dedicated approach to practicing law. His focus is on providing his clients with the highest levels of legal service. Clients love working with David, as he always works hard in their best interests with a smile on his face. David’s sports background and leadership skills are highly influential on the growth and success of Kormans LLP as he truly believes in fostering the Kormans LLP environment as both a family and a team!
When David isn’t closing real estate and corporate transactions, David is an avid runner, hiker and sports enthusiast. However, what David enjoys most is spending quality time with his wife, kids, grandkids and friends at home, at the cottage, and on travels.
David is a frequent blogger, as well as a lecturer and panel member at seminars, webinars and workshops for real estate agents, mortgage brokers and home buyers. Please make sure to catch “David & David on Real Estate” – David’s featured Podcast which can be heard on RadioPublic, Spotify, Breaker, Anchor and Google Podcasts, and can be viewed on the Kormans LLP YouTube channel!
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