Offer to purchase question

[zerocool2009]

An easier option is to buy the house from the parents with a loan account from them. Assuming the house is registered in their names jointly, they can write off R100k each every year, so the debt will be settled in 5 years.

The parents are somewhat broke too. So that option isnt on the cards

Thanks for your inputs

 

[beefymoocow]

An easier option is to buy the house from the parents with a loan account from them. Assuming the house is registered in their names jointly, they can write off R100k each every year, so the debt will be settled in 5 years.

Yea other way is to structure a deal giving the usufruct and bare dominion in a specific way. Which would kinda reduce your donation burden and achieve the same thang. Can’t help you with that. Been ages since I opened up a tax textbook. Someone with tax knowledge would know.

 

[Speedster]

The parents are somewhat broke too. So that option isnt on the cards

Thanks for your inputs

From your comments I got the impression the house is paid off, in which case they don't need any funds for this. It's all book entries. The buyer will need to have funds to pay the lawyers though.

 

[newby_investor]

An easier option is to buy the house from the parents with a loan account from them. Assuming the house is registered in their names jointly, they can write off R100k each every year, so the debt will be settled in 5 years.

They might need to specify some sort of interest rate. SARS frowns on interest-free loans if I understand correctly.

Same effect, it will just take a bit more than 5 years.

 

[zerocool2009]

From your comments I got the impression the house is paid off, in which case they don't need any funds for this. It's all book entries. The buyer will need to have funds to pay the lawyers though.

Correct. The bond is paid up and settled!

I have never heard of buying a house on “good deeds”.

Think my friends issue is more if his parents get into financial trouble, and someone wants to claim the house for debt expenses.

 

[zerocool2009]

They might need to specify some sort of interest rate. SARS frowns on interest-free loans if I understand correctly.

Same effect, it will just take a bit more than 5 years.

Interest free is one thing. Buying a house on good deeds, is another. Interesting question for sure. Will keep you posted on this one too

Best wishes for 2021 guys!

 

[cguy]

@zerocool2009 What is the advantage of buying it? Can’t your friend just move in and have the parents leave them the house in their will?

 

[zerocool2009]

@zerocool2009 What is the advantage of buying it? Can’t your friend just move in and have the parents leave them the house in their will?

That was my suggestion too. (The will idea).

He is scared creditors might grab it (if poef hits the fan)!

I do know he cant get away with costs.

What puzzles me is the R0 (donation) thing.

I said to ask the transfer lawyers for advice before hand (going forward)

Best wishes for all you guys in 2021

This is a really nice thread! Hope it teaches any and everyone about buying property

 

[cguy]

That was my suggestion too. (The will idea).

He is scared creditors might grab it (if poef hits the fan)!

I do know he cant get away with costs.

What puzzles me is the R0 (donation) thing.

I said to ask the transfer lawyers for advice before hand (going forward)

Best wishes for all you guys in 2021

This is a really nice thread! Hope it teaches any and everyone about buying property

happy new year! (still 2020 here for a few more hours though).

 

[Speedster]

They might need to specify some sort of interest rate. SARS frowns on interest-free loans if I understand correctly.

Same effect, it will just take a bit more than 5 years.

The only interest-free issues I'm aware of are with loans to trusts of which the loanee is a connected person.

Correct. The bond is paid up and settled!

I have never heard of buying a house on “good deeds”.

Think my friends issue is more if his parents get into financial trouble, and someone wants to claim the house for debt expenses.

It's not buying on "good deeds" (whatever that means), it's taking a loan from his parents instead of from the bank. They then incrementally make donations to him which are set off against the loan.

 

[newby_investor]

It's not buying on "good deeds" (whatever that means), it's taking a loan from his parents instead of from the bank. They then incrementally make donations to him which are set off against the loan.

Yeah this. You'd take a contract between yourself and your parents to the conveyancing attorney setting out the terms of payment.

 

[zerocool2009]

The only interest-free issues I'm aware of are with loans to trusts of which the loanee is a connected person.

It's not buying on "good deeds" (whatever that means), it's taking a loan from his parents instead of from the bank. They then incrementally make donations to him which are set off against the loan.

The thing that I cant wrap my brain how they want to write off the full value in the buy, as donation tax is limited to R100k per year

You cant buy something and say it will take 10 years ...

The buying party doesnt want to get a loan or bond either.



I got now this example online:
“My father has sold his house at a discounted price to my eldest sister and some of the proceedsof the sale will be split between the remaining siblings. What are the tax implications for my father and is there any way to minimise the taxes which he will have to pay?

The difference between the market value of the house (confirmed by a property assessor) and the discounted price will be considered a donation, and will therefore be subject to Donations Tax of 20%. However, there is an annual exemption of R100 000 per person per year, so only the donation amount exceeding R100 000 will be taxed.

In addition to the Donations Tax payable on the discount, he will need to pay Donations Tax on the proceeds that he distributes to his other children. Your father could also distribute the proceeds over multiple tax years, in order to take advantage of the R100 000 annual exemption. “

 

[Speedster]

The thing that I cant wrap my brain how they want to write off the full value in the buy, as donation tax is limited to R100k per year

You cant buy something and say it will take 10 years ...

The buying party doesnt want to get a loan or bond either.



I got now this example online:
“My father has sold his house at a discounted price to my eldest sister and some of the proceedsof the sale will be split between the remaining siblings. What are the tax implications for my father and is there any way to minimise the taxes which he will have to pay?

The difference between the market value of the house (confirmed by a property assessor) and the discounted price will be considered a donation, and will therefore be subject to Donations Tax of 20%. However, there is an annual exemption of R100 000 per person per year, so only the donation amount exceeding R100 000 will be taxed.

In addition to the Donations Tax payable on the discount, he will need to pay Donations Tax on the proceeds that he distributes to his other children. Your father could also distribute the proceeds over multiple tax years, in order to take advantage of the R100 000 annual exemption. “

You still don't get it.

Year 1: Son buys house from parents. Parents extends loan to son to the value of the house. Son now has house and debt of R1m. Parents have asset of R1m loan they've extended. There has been no donation yet.

Parents now donate R100k to son, writing it off against the loan. Son has house and liability of R800k. Parents have R800k asset in loan they extended.

Year 2-5: parents each donate R100k to son annually, writing it off against the loan until the loan is fully settled.

Capeesh?

 

[beefymoocow]

You still don't get it.

Year 1: Son buys house from parents. Parents extends loan to son to the value of the house. Son now has house and debt of R1m. Parents have asset of R1m loan they've extended. There has been no donation yet.

Parents now donate R100k to son, writing it off against the loan. Son has house and liability of R800k. Parents have R800k asset in loan they extended.

Year 2-5: parents each donate R100k to son annually, writing it off against the loan until the loan is fully settled.

Capeesh?

Just be careful of s80A in the tax act. It might meet and qualify for requirements. But I know you can get away with it.

General anti-avoidance rule (GAAR)

This article explains the important topic of the promulgated general anti-avoidance rules in the Income Tax Act. SARS is serious about tax compliance and does not respond kindly to any tax avoidanc

www.sataxguide.co.za

 

[zerocool2009]

You still don't get it.

Year 1: Son buys house from parents. Parents extends loan to son to the value of the house. Son now has house and debt of R1m. Parents have asset of R1m loan they've extended. There has been no donation yet.

Parents now donate R100k to son, writing it off against the loan. Son has house and liability of R800k. Parents have R800k asset in loan they extended.

Year 2-5: parents each donate R100k to son annually, writing it off against the loan until the loan is fully settled.

Capeesh?

I get that. What you dont get. Zero loan want to be made (from either party)

To explain it simple, they want to do a substitution, but they cant, as the new home owner’s name isnt on the title deed now.

 

[Speedster]

I get that. What you dont get. Zero loan want to be made (from either party)

To explain it simple, they want to do a substitution, but they cant, as the new home owner’s name isnt on the title deed now.

Which is why you follow the process above to donate the house. An instant donation will attract tax

 

[zerocool2009]

Which is why you follow the process above to donate the house. An instant donation will attract tax

To give the objective in another angle... they want to do what the power of a substation is, but their names isnt on the deed!

A substation you only pay for the legal fees! Zero sars or taxes involvement (even if its R10 000 000)

 

[Gozado]

If I've understood you correctly, the parents are broke, but they have managed (in the past) to fully pay off the mortgage. The son is afraid that if the parents get into financial trouble (which seems likely), then someone will lay a legitimate claim against the house, to get it sold to pay off the parents' debt. The son doesn't have enough money of his own to support the parents and save them from this plight, so he (and perhaps the parents) want to at least secure what they can by getting the house out of the parents' name(s) and into the son's name.

The son hopes that it would be okay for the parents just to donate him the house, and the only fees would be the transfer fees, to get it into his name. Several people have explained that it doesn't work like that because SARS will charge tax on the deal.

The better option seems to be for the son to actually buy the house from his parents. He can do this only if they really do own the house in their name(s). Do you mean, here, that the house is not, in fact, in the parent(s) names? If not, why not?

.... their names isnt on the deed!

If they do own it fully, with all the right paperwork, then he can buy it.

What others have written seems sensible. To set out speedster's explanation in a bit more detail:
The parents and the son decide, together, on the purchase price (let's just say 1'000'000). The son offers to buy the house. The parents accept his offer. Now he must pay them 1'000'000. He doesn't have that.

At the same time, in a separate arrangemnt, he asks the parents to loan him 1'000'000 (or a bit less). They say yes, and the contract states the interest rate, and that he will make repayments at the rate of 100'000 per annum.

On his next birthday, his parents give him a nice birthday present of 100'000. Or at least, they want to do so. After all, SARS has a view on gifts of this size, as "small enough".
The son says: "Wow, thanks! I know you don't actually have that cash, so can't we just subtract that from the amount I still owe you for the house?" The parents agree, and now he owes them only 900'000 (approximately, as the interest must be calculated).

If the parents do this every year, they will empower him to buy their house immediately, and gradually pay off the loan using the gift they give him, each year.

 

[Gozado]

What could go wrong? For example:

• The son might be silly with his finances, and take over ownership of the house, but then not look after it, or get into financial trouble of his own and have creditors chasing him, such that he'd have to sell the house to settle his own debts.
• The son might be evil, and throw the parents out once he owns their house.
• The parents may have other children. If so, to prevent family feuds and generational accusations, pain and bitterness, it might be wise to discuss the deal with them.
• The parents may not agree with each other about this idea. Or they may change their minds, and later not give the son the birthday present every year, so that his debt is not reduced as they first envisaged it would be.

Both parties need to think through what this would mean if one or the other side defaults or dies. One way of gaining clarity on such family deals is to imagine the whole thing, including things going horribly wrong, and then imagine all the same things happening, but with a complete stranger. Sometimes that mental exercise can help to figure out whether the deal is skewed or unfair to one or the other family member.

• Is there any risk that the parents could/would consider claiming their debt repayments from the son, and (if the son doesn't have enough money to pay) thereby force the son to sell the house to pay of his own debt?
• Is there any risk that the son would leave the parents without accommodation? If the idea is for the parents to continue living there, then the purchase contract should specify those rights for the parents, for as long as they live.
• Is the son going to live in the house with his parents? If he does so now, is he paying rent? If he then owns the house, will he use the rent he saves to support his parent (and for the upkeep of the house)? Would he require his parents to pay rent?
• Will there be any obligation by the son to support his parents if they move out, or if he wants to sell the house, later?
• If one parent dies, will the deal be continued by the other parent? Do both parents agree on this?
• If both parents die, will the loan be automatically cancelled? Or might the son still owe the outstanding amount to the parents' Estate, from where it might return, in part, to his siblings?

Finally, put all of it in writing. Just don't skip this step.

 

[zerocool2009]

If I've understood you correctly, the parents are broke, but they have managed (in the past) to fully pay off the mortgage. The son is afraid that if the parents get into financial trouble (which seems likely), then someone will lay a legitimate claim against the house, to get it sold to pay off the parents' debt. The son doesn't have enough money of his own to support the parents and save them from this plight, so he (and perhaps the parents) want to at least secure what they can by getting the house out of the parents' name(s) and into the son's name.

The son hopes that it would be okay for the parents just to donate him the house, and the only fees would be the transfer fees, to get it into his name. Several people have explained that it doesn't work like that because SARS will charge tax on the deal.

The better option seems to be for the son to actually buy the house from his parents. He can do this only if they really do own the house in their name(s). Do you mean, here, that the house is not, in fact, in the parent(s) names? If not, why not?



If they do own it fully, with all the right paperwork, then he can buy it.

What others have written seems sensible. To set out speedster's explanation in a bit more detail:
The parents and the son decide, together, on the purchase price (let's just say 1'000'000). The son offers to buy the house. The parents accept his offer. Now he must pay them 1'000'000. He doesn't have that.

At the same time, in a separate arrangemnt, he asks the parents to loan him 1'000'000 (or a bit less). They say yes, and the contract states the interest rate, and that he will make repayments at the rate of 100'000 per annum.

On his next birthday, his parents give him a nice birthday present of 100'000. Or at least, they want to do so. After all, SARS has a view on gifts of this size, as "small enough".
The son says: "Wow, thanks! I know you don't actually have that cash, so can't we just subtract that from the amount I still owe you for the house?" The parents agree, and now he owes them only 900'000 (approximately, as the interest must be calculated).

If the parents do this every year, they will empower him to buy their house immediately, and gradually pay off the loan using the gift they give him, each year.

Thanks for all your input and comments.

The BOLD highlighted section is what I don't get. The son doesn't want to borrow money (as in a homeloan), nor does the parents want to borrow (as in lending) him the cash. As I said, neither party have the finances to do this transaction.

You cant write IOU's out. I totally het the R100K off yearly per SARS's rules