How to Record Money from the Bank of Mum and Dad When Buying a First Home

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Introduction:

Are your parents helping you buy a home, but you’re unsure how to record their financial contribution? In this newsletter, we’ll walk through two common options:

1. a Deed of Gift (DOG) and

2. a Deed of Acknowledgement of Debt (DOAD).

To make things clearer, we’ll use the case study of Ernie and Bert, a couple who recently navigated this process.

What this newsletter will cover:

The pros and cons of using a DOG or a DOAD to structure parental contributions when buying a home, and how each option impacts relationship property.

What this newsletter will not cover:

We won’t dive into Contracting Out Agreements (COAs) or the broader details of relationship property law. If you’re curious about COAs, check out our blog for more insights.

PROBLEM: Not Sure How to Record Your Parents’ Help?

• Many first home buyers, like Ernie and Bert, receive financial help from family but aren’t sure how to properly document the contribution.
• If the money isn’t recorded correctly, it may become relationship property, meaning it could be split in the event of a breakup.

RISK: Incorrectly Recording the Contribution Can Lead to Disputes

• Failing to properly structure the contribution can create complications down the road, especially if Ernie and Bert, or couples in similar situations, split up.
• Without clear documentation, Ernie’s parents could lose control of the funds, and Bert might end up with a claim for part of the money.

CONTEXT: Ernie and Bert’s Case Study – DOG vs. DOAD

• The Scenario: Ernie’s parents want to contribute $120,000 toward the couple’s $600,000 home. The couple has heard of both a Deed of Gift (DOG) and a Deed of Acknowledgement of Debt (DOAD) but aren’t sure which is the best option.

1. Deed of Gift (DOG)

• Ernie and his parents sign a DOG, and Ernie receives the $120,000 as a gift.
• The money becomes relationship property because it was used to buy a home shared with Bert.
• If Ernie and Bert break up and sell the house, they would split the proceeds equally, meaning Bert could claim half of the $120,000.

2. Deed of Acknowledgement of Debt (DOAD)

• Instead, they could sign a DOAD, recording the $120,000 as an interest-free loan.
• In this case, the money is treated as relationship debt, and Ernie’s parents can claim the full amount back if the house is sold due to a breakup.
• This option ensures Bert wouldn’t have a claim on the money, and Ernie’s parents are repaid in full.

SOLUTION: Which Option Should Ernie and Bert Choose?

1. Use a DOG if:

• The money is intended to benefit both partners equally, even if they break up.
• In the event of a sale, both Ernie and Bert would split the proceeds, including the contribution from Ernie’s parents.

2. Use a DOAD if:

• It’s important that Ernie’s parents get their money back in case of a breakup.
• The DOAD records the contribution as a loan, ensuring that Ernie’s parents are repaid before the remaining sale proceeds are divided.

TL; DR:

• Deed of Gift (DOG): The money becomes relationship property, meaning both partners benefit equally.
• Deed of Acknowledgement of Debt (DOAD): The money is treated as relationship debt, ensuring Ernie’s parents are repaid if the couple splits up.
• Use a DOG if you want the money to be shared, and a DOAD if you want it returned to the parents.

Warning. This newsletter is not independent legal advice and you should consult with your own lawyer about entering into any sale and purchase agreement.