Should parents who want to pay off their child’s mortgage make a notarial deed of donation in favor of the borrower child or the lending bank?
A mortgage is a contract by which a sum of money or another quantity of fungible goods is borrowed. Over time, it has become an exclusively banking operation which identifies the financing intended to purchase a property in exchange for the granting of a mortgage on the same, as a guarantee from the credit institution in the event of default by the debtor. In this article, we will deal with a specific issue: we will see how to pay off a mortgage with a donation.
Let’s say that the parents want to pay off the mortgage taken out by their son to buy a property by paying the remaining amount of the loan to the creditor bank. Would this operation be legitimate? How should it be carried out? Who should benefit from the notarial deed? Let’s delve deeper into the issue.
What is a mortgage?
As anticipated, the practice has made the mutual an almost exclusively banking operation; therefore it indicates a loan to medium-long term (even up to 30 years) secured by mortgage on a property (not necessarily the one on which the mortgage is taken out).
Typically, its amount is approximately equal to the80% of the value of the property to be purchased, as assessed by the bank’s expert.
What is donation?
The donation is the contract whereby one party voluntarily decides to impoverish itself to enrich another. In practice, it is a real “gift”.
Usually, with the donation you transfers an assetmovable or immovable, to the beneficiary; this does not mean, however, that it cannot also consist in theassumption of an obligation with respect to the donee (for example, to produce a work free of charge or to pay a debt).
To be valid, the donation contract must be made by public deedthat is, by a notary, in the presence of two witnesses.
A donation without a public deed is permitted only in the event that it has as its object a movable good of modest value: this is the classic case of gifts exchanged on the occasion of holidays and celebrations (weddings, anniversaries, Christmas, etc.).
How can you pay off a mortgage with a donation?
Parents who decide to extinguish the mutual of the son make a act of generosity: therefore, the operation can be validly classified as a donation for all intents and purposes.
As mentioned in the previous paragraph, in fact, the donation can also consist ofassumption of an obligation which, in this case, is to pay off someone else’s debt (the son’s, to be precise).
Well, the best solution to avoid investigations and sanctions is a notarial deed of donation of money from parents to child, accompanied by the relevant wire transfer o bank draft of the amount equal to the mortgage to be repaid. It will then be the donee to use the money to pay the bank to which he owes.
If the parents preferred instead pay off the mortgage directlythus paying the bank, the operation should still be accompanied by a Notarial deed of donationotherwise it could be classified as a loan or be declared Nothing due to a defect in form.
Donation for the benefit of the child: what taxes are paid?
The donation of money made by parents in favour of their child, even if aimed at paying off the latter’s mortgage, benefits from the one million euro franchise provided for donations between spouses and relatives in a direct line: within this threshold, the donation tax is not paid rate equal to 4% of the value donated.
If instead the Donation to pay off the mortgage is made in favor of other subjects, the following taxes apply:
- Between brothers and sisters the tax-free limit is 100,000 euros, so only after this amount will the inheritance tax have to be paid, which, in this case, is equal to 6%;
- Between relatives up to the 4th degree (like cousins), related in a straight line (in-laws) and related in collateral line up to the 3rd degreethere is no deductible and the rate is 6%;
- Between amici o different subjects compared to those identified above, the taxation is 8% on the entire amount.
The gift tax is paid by the doneewho benefits from the contract.
Finally, it should be noted that when the donation has as its object real estate or real estate rightsmust be transcribed and transferred to the land registry with the application of the Land registry taxes in proportion (2% and 1%) on the determined value, regardless of any deductible.
