Considering a parental purchase? If you're the parent of a young adult who is thinking about buying their first home, you're probably aware of how challenging it can be to get a foothold in the overheated housing market.
A forældrekøb (parental purchase - parents buy a home for their child, typically a student, to live in) can be a good solution to this problem, but it's important to consider every aspect of this option before making the decision. In this guide, we'll go through the most important things you need to know about a parental purchase.
Below you'll find answers to:
- What is a parental purchase?
- Why should I make a parental purchase?
- Considerations before a parental purchase
- How does a parental purchase work?
- Get buyer advisory support from Bomae
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What is a parental purchase? First of all, what actually is a parental purchase? As the name suggests, a parental purchase is when parents buy an apartment or other home for their children. In effect, a parental purchase is simply the purchase of a home with the intention of renting it out. The purpose of a parental purchase can be to help the children get a foothold in the housing market, or it can be an investment where the parents earn a good rental income. Parental purchases are especially common in the larger cities, where it can be difficult to find rental housing that's affordable for students in particular.
The home is often bought partly with the children's own savings or with help from the parents themselves. A parental purchase also makes it possible to transfer an asset to the child on special terms.
It's important to consider every aspect of a parental purchase, including financing and tax and legal considerations, before deciding to buy a home for this purpose.
Reverse parental purchase
A reverse parental purchase is the opposite scenario - namely when the "child" buys a home for their parents. This article deals solely with parental purchases where the parents acquire a home with a view to renting it out to their children, but the same conditions apply if the situation is reversed.
Why should I make a parental purchase? A parental purchase can be a good idea if you have equity in your home (friværdi) or don't already own a property. Buying real estate has historically been a good way to invest your money. The longer the investment horizon, the safer the investment tends to be.
The biggest reason for making a parental purchase is, of course, to create a secure setting for your children when they move away from home.
It's a good idea to think ahead when making a parental purchase. For example, if finances allow, it can pay off to find a larger apartment with more rooms, where it's possible to rent out a room and where, in the longer term, there could be room to start a family.
You should ideally plan for a time horizon of at least five years. It's therefore important to have a serious conversation with your children and, as mentioned, make sure the apartment doesn't become too small for their needs too quickly.
Read more about what you can afford to buy.
Although many of the benefits of a parental purchase are limited, there are still a number of advantages worth highlighting.
Considerations before a parental purchase If you're thinking about making a parental purchase, it's first and foremost important that you align expectations and get your finances in order. You shouldn't start by looking at homes - instead, focus on the so-called three-step approach: 1) financing first, 2) then area, 3) and then the specific home.
It's also worth thinking about the tax and legal considerations involved in a parental purchase. To align expectations properly, it's also important that you start by agreeing on the key priorities - both for the child and for you as parents.
Another good piece of advice is to plan for a long time horizon, since you'll want to avoid a situation where you're forced to sell the apartment at a bad time. You can also make the apartment more future-proof by buying one with three rooms. That way, there's room for a potential future addition to the family - or a room can be rented out - without the apartment becoming too cramped.
Financing a parental purchase First, you need to consider how to finance the purchase. This can be done by borrowing money in your own name or by setting up a joint property account with your children. It can also be a good idea to look into the options for taking out a mortgage loan (realkreditlån) or a bank loan to finance the parental purchase.
Choose the right area for your parental purchase
Next, you need to consider which area you want to buy in. It can be a good idea to research the market thoroughly and consider various factors such as location, price development, and infrastructure before deciding where you want to invest.
The parental purchase itself
Finally, you need to consider the specific home in relation to the parental purchase. It's important to find a home that meets the children's needs while also matching the parents' wishes and finances. There may also be various legal and financial considerations to take into account when deciding which home to buy.
Tax considerations
When you buy a home, it's important to consider the tax implications. If you rent out the home, you must pay tax on 56 percent of the income from renting out the parental purchase. You should also consider how you want to split ownership of the home, as this can affect the tax implications.
Legal considerations
When you buy a home, there are several legal aspects to consider. It's important to have a clear agreement with your children regarding rent and other matters. It can also be a good idea to talk to a lawyer about the legal aspects of a parental purchase.
How does a parental purchase work? A parental purchase works by the parents buying a home, which they then rent out to their children. The young adults then pay rent that covers the costs of the home, including the parents' loan repayments and interest, property tax, and other expenses. In some cases, there may also be a form of purchase-option agreement (køberetsaftale), where the children can later take over the property and any remaining debt from the parents.
It's important to have a clear agreement covering all aspects of the parental purchase in order to avoid misunderstandings or disagreements later on. When renting the home out to your child, it's therefore important that you draw up a written lease agreement that complies with the Danish Rent Act (lejeloven). Likewise, you need to make sure you're charging market rent for the area. The market should therefore be researched to see what others pay in rent, so you can charge roughly the same amount from your child.
Alternatively, the lease agreement can be completed and submitted to the Rent Tribunal (Huslejenævnet) to obtain pre-approval of the rent. A pre-approval provides assurance that the rent agreed with the child cannot later be challenged.
If you set the rent too low, the Danish Tax Agency (SKAT) can send you an additional tax bill, since you'll be taxed on the difference between the market rent and the rent actually charged. This means you'll end up paying tax on rental income you never received. For that reason, it's not recommended to give your child financial help in the form of unusually low rent.
If you want to help beyond the parental purchase itself, you could consider giving your child an annual tax-free gift of up to 71,500 kr. (2023). The gift tax rate is generally 15% of the amount exceeding the tax-free threshold. Note that the tax-free gift threshold is adjusted annually.
Sublease agreement
If a room in the home is to be rented out, it's important that a written agreement (fremlejeaftale, or sublease agreement) is made between the person renting the room and your child, since as the owner you would normally be taxed on rental income.
However, as the tenant (your child), this tax can be avoided by subletting one or more of the rooms in the home, since a tenant doesn't have to pay tax on sublease income as long as that income stays below two-thirds of what they themselves pay in rent.
The Rent Act also contains more lenient rules for terminating a room tenancy than for terminating the tenancy of an entire apartment.
Another clear advantage of letting the tenant (your child) handle the subletting is that, as the owner, you retain the option to terminate the entire tenancy in one go.
The business tax scheme
When making a parental purchase, most people opt for the so-called business tax scheme (virksomhedsskatteordningen). Renting out an owner-occupied home is in fact considered a business activity - even when it's to the parents' own child.
To use this scheme, you're required to keep detailed accounts and file an extended tax return. Many people therefore set up a separate account for the parental purchase, showing only the related income and expenses. It's advisable to have the accounts prepared by an accountant, whose fee is, incidentally, also tax-deductible.
The capital return scheme
An alternative, and a somewhat simpler solution, is to use the capital return scheme (kapitalafkastordningen). This doesn't come with the same accounting requirements. This scheme is typically used if the home was bought wholly or partly with cash.
Under the capital return scheme, you deduct an amount calculated as a percentage of the apartment's cash value at the time of purchase - minus any debt - instead of deducting interest expenses from your personal income.
Family loans
An alternative to the classic parental purchase is to let the child buy the home themselves, while the underlying financing is provided through a so-called family loan (familielån) from parent to child. A family loan can be made both interest-free and repayment-free. For parents, a family loan can also be advantageous in terms of minimizing negative interest on bank deposits.
For an andelsbolig (housing co-operative share), for example, most housing co-operative associations require that whoever acquires the share also takes up residence in the co-operative apartment. In such cases, a family loan may be the only way to make the acquisition possible.
Read more about good advice when buying a housing co-operative share. What happens when you want to resell your parental-purchase apartment?
When the day comes that the parental purchase is no longer relevant - either because the child is moving out, or because a situation arises where you want to pay off the loans - it's important to carefully consider the situation before a sale. If you've built up equity, either through higher sale prices or through loan repayments, there will typically be a profit from the sale. This profit is taxable, provided you haven't lived in the home yourself.
A good alternative can be to sell the home on to your child on favourable terms.
For example, if the owner-occupied apartment is transferred to the child at a value lower than its actual market value, the parents' taxable gain, if any, will be reduced, while the child's potential future tax-free gain will be increased.
The child will then have the option to later sell the apartment tax-free, provided the child has genuinely lived in the apartment after the purchase. For more on the use of the 15% and 20% schemes, see earlier in the article.
Get buyer advisory support from Bomae If you're considering buying a home for your child, buyer advisory support is an obvious option. This way, you ensure that you comply with all the rules and that you buy at the right price and on the right terms.
At Bomae, we continuously monitor the rules and developments in this area, so if you're weighing up a parental purchase, give us a call and let's have a good conversation.
