Is it a gift or a loan when parents help kids buy a home? How to avoid family fights over money
When money is coming from the ‘Bank of Mum and Dad’, a recent study found parents and adult children can have very different assumptions – which they rarely discuss.
Recent research in Australia highlights the potential legal risks associated with family financial assistance for home purchases, commonly referred to as the "Bank of Mum and Dad." The study, which surveyed 80 older parents and adult children primarily from Sydney, found that both parties often struggled to determine whether the money provided was a gift or a loan, with an average transfer amount of $75,000, although in some instances, it was as high as $500,000.
Banks typically require written proof to classify such funds as gifts, to avoid reducing the homebuyer's borrowing capacity due to repayments. However, many participants in the study signed gift letters even when they considered the money a loan, leading to potential family disputes. Under Australian law, funds transferred from parents to children, without proof, are presumed to be gifts, placing the burden of proof on parents if they expect repayment.
While the distinction between gifts and loans seems clear, the study found this line frequently blurred, with loans sometimes turning into gifts over time as repayments ceased. Communication issues and reluctance to discuss money between family members were significant factors. Most participants did not seek professional advice or document their agreements, leading to misunderstandings and potentially costly legal battles.
The recommendation is to clearly communicate expectations, document arrangements, and seek professional advice to prevent disputes.
Written by urgent.news from The Conversation AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
