The Hidden Costs of Gifting Property to Your Children

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The Hidden Costs of Gifting Property to Your Children: What You Need to Know

Sep 30, 2024
capital gains tax estate planning financial planning property ownership

Many parents dream of helping their children get a foothold on the property ladder. While gifting money or acting as a mortgage guarantor are common ways to provide support, some parents go further—transferring a property outright to their child. This might sound like a generous move, but it's not as simple as changing the name on the deed. Significant costs and tax implications can arise, so it's important to know what you’re getting into.

 

Here’s a breakdown of the key considerations and potential challenges when transferring property to your child.

 

Capital Gains Tax (CGT): A Hidden Cost

You might assume that giving a property to your child means bypassing the usual taxes, but the Australian Taxation Office (ATO) sees things differently. Whether you sell, transfer, or gift property for less than its market value, the ATO applies the market value substitution rule. In short, you’ll be treated as if you sold the property for its full market value, and if it’s increased in value since you bought it, you’ll owe capital gains tax on the profit—even if no money is exchanged.

 

Tip: If the property was your main residence, you may be exempt from CGT, and if not, you may qualify for a CGT discount if you’ve held the property for more than a year. To reduce your tax burden, consider including eligible costs like surveyor fees, real estate agent fees, and repairs in your property’s cost base.

 

Transfer Duty (Stamp Duty): Another Expense to Watch Out For

Even though you're giving the property to your child, transfer duty (formerly known as stamp duty) still applies. The duty is calculated based on the current market value of the property, not the sale price (which is zero in a gift scenario). The exact amount varies by state or territory, so it’s crucial to check the specific rates where the property is located.

 

Mortgaged Property: Complicating Matters Further

If the property you’re transferring is still mortgaged, things get trickier. The mortgage transfers along with the property, meaning your child will need to undergo all the usual checks by your lender to ensure they can service the loan. There may also be upfront costs to consider, such as mortgage registration fees and mortgage insurance.

 

Tip: Make sure your child fully understands the financial commitment before agreeing to the transfer, and work with your lender to ensure the process runs smoothly.

 

Will Gifting Impact Your Centrelink Entitlements?

If you’re receiving Centrelink payments, gifting a property could affect your income and assets test. Centrelink may continue to deem the gifted property as part of your assets for up to five years after the transfer, potentially reducing your payments.

 

Tip: Speak with a financial adviser to assess how a property transfer might affect your entitlements and whether it’s the best move for your financial situation.

 

Other Considerations: Protect Yourself and Your Child

Here are a few other key considerations when transferring property to your child:

 

1. Professional Valuation A professional valuation is essential to avoid disputes with the ATO. This ensures that the property is valued correctly, and you’re not under-reporting its worth to reduce your tax bill.

 

2. Impact on Your Retirement Gifting a property might leave you financially vulnerable in retirement. Before making the transfer, evaluate your long-term financial needs and talk with your family about how the decision might impact your lifestyle.

 

3. Legal Protection: Deed of Gift Once the property is transferred, you’ll no longer have control over it. Having a deed of gift drawn up by a lawyer can formalize the transfer and ensure there are no misunderstandings down the line.

 

Alternative Ways to Help Your Child Enter the Property Market

If transferring a property seems too complicated or costly, there are other ways to help your children get on the property ladder:

 

• Let them live with you while they save for a deposit.
• Gift or lend them a sum to help with the deposit.
• Co-purchase a property with your child, though this may affect their eligibility for first home buyer grants.

 

Final Thoughts: Get Professional Advice Before Making Big Moves

Transferring property to your child is a generous act, but it’s not without its challenges. From taxes to potential impacts on your retirement and Centrelink payments, it’s important to weigh all the pros and cons. Consulting with a financial adviser, tax expert, and lawyer is essential to ensure the process runs smoothly and doesn’t negatively affect your financial future.

 

This article provides general educational information only. The content does not take into account your personal objectives, financial situation, or needs. You should consider taking financial advice tailored to your personal circumstances. Life Sumo (Orion Enterprises (Cairns) Pty Ltd) has representatives that are authorised to provide personal financial advice. If you would like personalised advice - please click here to talk with our team.

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