What to consider when transfering property to family
With the property market as tight as ever, many parents want to help their adult children own their first home. Here are some tips on how that can be done.
There are many different ways for parents of family members to financially assist children into the property market, and one of them is transferring a property title to the family member either as a gift or by selling it to them at a discounted price.
An understanding of the benefits and drawbacks of either gifting or selling will help ensure that it all goes smoothly, and family dinners don’t become a minefield.
How to gift a property to family or friends
You may be in such a position that you have the desire and capacity to gift a property to a family member or friend without receiving money in return.
In order to gift a property, you will transfer the title over to the person of your choice and no money will need to change hands. Although you may not need to have a contract of sale drawn up, you may want to have a document drawn up called a “gift deed”. A lawyer or estate planning specialist will be able to help you with the legal aspects of the transfer, which can be a rather simple process.
Additionally, you may want to engage a valuer to determine the value of the property.
An important point to be aware of is that the transfer of the property will be deemed to have been done at market value. This has implications on the potential tax liabilities and the stamp duty payable.
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Considerations when gifting a property
Important reminders for the gifter (or ‘vendor’)
- The transfer of the property is a capital gains tax event, which may result in the vendor incurring a tax liability in that financial year (unless the property is your principal place of residence, in which case you will be able to utilise the main residence exemption for capital gains tax purposes)
- As a gift, you receive nothing in exchange for the property. In this situation, the ‘market value substitution rule’ will apply, meaning the tax office will deem you to have received the market value of the asset at the time of the transfer
- It may be a good idea to get a valuer involved to help establish the market value, so that the tax office see that you have not undervalued the property in order to avoid paying tax
- You will need to sign a “gift deed”, which is a document that allows you to gift assets or transfer ownership without money being exchanged. Once you gift the asset, it is no longer yours and you no longer have control of the asset. You also cannot take back ownership of the asset
- It may be a good idea to work with a lawyer or estate planning specialist for the legal documents required so that there is written support in place should the property transfer ever be questioned
- Even though no money is being exchanged for the property, there will be fees associated with engaging a valuer and legal professionals, and these fees can be included in the CGT cost base of the property, which will reduce the amount of the taxable capital gain.
- Gifting assets reduces the level of capital you will have available to fund your retirement
- Gifting a property should not be done in the hope that it will result in an increase in social security benefits. Centrelink will continue to count the asset for a period of five years (i.e. they will count the part that is excess over the gifting thresholds of $10,000 per financial year, and $30,000 over 5 financial years).
Important reminders for the recipient (or ‘purchaser’)
- Stamp duty will be payable on the market value of the property, which is paid by the ‘purchaser’
- You will also be liable for the government charges associated with the transfer of the property title
- Your ability to access the First Home Owner Grant (FHOG) may be impacted
- If the ‘market value substitution rule’ is triggered, your CGT cost base of the property will be the market value at the time of the transfer.
Alfred has an investment property that he owns in addition to his main residence. He bought the investment property with the intention of giving it to his child once they turned age 25. Alfred’s son, Edgar, is about to turn 25 and Alfred is now getting everything in order to have the property transferred into Edgar’s name.
Alfred engages a conveyancer, who prepares the legal documents required to transfer the property title. He also engages a valuer to provide a current market valuation of the property.
The property has gone up in value since Alfred initially purchased it, so he will realise a capital gain once the transfer of the title takes place. For the purpose of calculating the tax liability, the market value of the property at the time of the transfer should be applied. He has held the property for longer than 12 months and therefore is eligible to utilise the capital gains tax discount of 50%.
To illustrate these points:
- Alfred bought the property for $250,000 in 2000*
*Including acquisition costs and other cost-base adjustments - The current market value of the property is $500,000
- He transfers the title to his son Edgar, receiving no consideration
- To calculate how much to include in Alfred’s taxable income, we use the current market value, less the cost base, and then apply the capital gains tax discount
= $500,000 less $250,000
= Profit of $250,000 x 50% capital gains tax discount
= $125,000 to be included as a capital gain in Alfred’s tax return and tax payable at his marginal tax rate
Edgar needs to pay the stamp duty for the property so that the transfer can take place.
How to sell a property to family or friends
You may have the desire to help a family member or friend get into the property market, but not necessarily have the financial capacity or desire to gift a property entirely.
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You could consider selling your property to a family member or friend and giving them a discount on the price, meaning you adjust the price to give them a better deal than they would get if purchasing in the open market.
Considerations when selling a property to family or friends
Important reminders for the seller (or ‘vendor’)
- The sale of the property is a capital gains tax event, which may result in the vendor incurring a tax liability in that financial year (unless the property is your principal place of residence, in which case you will be able to utilise the main residence exemption for capital gains tax purposes)
- If the sale price is less than the market value of the property, the ‘market value substitution rule’ will apply, meaning the tax office will deem you to have received the market value of the asset at the time of the transfer.
- It may be a good idea to get a valuer involved to help establish the market value, so that the tax office see that you have not undervalued the property in order to avoid paying tax
- You will need to have the paperwork drawn up, which could be a transfer document for a family member, or a more official contract of sale if selling to a friend. You should seek the services of a conveyancer or solicitor to ensure the right paperwork is completed
- Selling property can potentially free up cash for other purposes such as investing in other assets, however, it is important to consider that selling assets at a discount reduces the level of capital you will have available to fund your retirement
- Selling property at a discount should not be done in the hope that it will result in an increase to or eligibility for social security benefits. Centrelink will potentially count the amount of the discount given as an asset for five years (i.e. they will count the part that is excess over the gifting thresholds of $10,000 per financial year, and $30,000 over 5 financial years).
Important reminders for the recipient (or ‘purchaser’)
- If you are obtaining finance to fund the purchase there may be additional requirements, for example, the bank may require a statutory declaration from the vendor to confirm the equity in the property has been gifted
- A potential benefit when obtaining finance to fund the purchase where a discount is being given is that many lenders will accept the bank valuation of the property over the purchase price when they calculate the maximum loan-to-value ratio (LVR), which could result in you borrowing the full the purchase price amount without incurring Lenders Mortgage Insurance (LMI)
- Stamp duty will be payable on the market value of the property, not the purchase price, which is paid by you as the ‘purchaser’
- You will also be liable for the government charges associated with the transfer of the property title
- Your ability to access the FHOG will depend on the market value of the property as well as your intended use of the property.
Sarah owned an investment property, originally purchased for $1,100,000 in 2015*.
In 2021, the value of the property had dropped to $900,000 due to poor market conditions
Sarah’s daughter, Anita, was looking to get into the property market and so Sarah decided to sell the property to her daughter for $900,000
To ensure that the transaction was done properly, Sarah engaged a valuer to get an official market valuation of the property. She also engaged a conveyancer to process the legal paperwork
Anita arranged her loan finance for the purchase based on the $900,000 value and the stamp duty amount payable by Anita was also based on this value
Sarah will have a capital loss of $200,000 that can be applied to reduce capital gains on other CGT assets for in 2021 or future years.
*Including acquisition costs and other cost-base adjustments
An example of selling property at a discount, resulting in a capital gain
Sarah owned an investment property, originally purchased for $1,100,000 in 2015*.
In 2021, the value of the property had dropped to $900,000 due to poor market conditions
Sarah’s daughter, Anita, was looking to get into the property market and so Sarah decided to sell the property to her daughter for $900,000
To ensure that the transaction was done properly, Sarah engaged a valuer to get an official market valuation of the property. She also engaged a conveyancer to process the legal paperwork
Anita arranged her loan finance for the purchase based on the $900,000 value and the stamp duty amount payable by Anita was also based on this value
Sarah will have a capital loss of $200,000 that can be applied to reduce capital gains on other CGT assets for in 2021 or future years.
*Including acquisition costs and other cost-base adjustments
Final thoughts
Be aware that gifting or selling property at a discount can impact your child’s ability to access first home-owner grants.
In all situations, it may be a good idea to discuss your intentions as a family and to update your will to ensure other beneficiaries are not disadvantaged and to avoid family issues in the future.
The decision to gift or sell the property should be made in the context of your overall wealth and estate planning strategy.
Should you wish to discuss one of these options further within the context of your personal circumstances, please speak to your local BDO Private Wealth adviser.
This article was written by Kelly Kennedy, Financial Adviser, Business Services at BDO.
