With the difficulty of finding a nice, affordable property in the right area, much less putting together a down payment for the current housing prices, it may seem unlikely that your children will ever get their own home and this is something you’d very much like to help them with.
Many parents find themselves in the position of owning the family home, now too big for just one or two people, while they watch their children fighting an uphill battle with the housing market.
From this perspective, it seems like a perfectly good idea to simply put your child’s name on the title and essentially gift them the house.
This may seem like the right solution, but houses aren’t like cats or lawnmowers – you can’t just gift one without serious financial manoeuvering.
Concerns with house gifting
There are four major financial concerns when it comes to gifting your family home to your child or children. The first is the capital gains tax, which will be paid on the fair market value of the house rather than the price (if any) for which you ‘sell’ to your children. This tax is based on the difference between what you bought the home for and what it’s official value is today, and you, the parent, pay it.
The second concern is the stamp duty, which is how much anyone has to pay to acquire a home in one of the Australian states. Again, this is based on the value of the home, not the amount of money that actually changes hands. It should be noted that if this is your child’s first home (and you don’t live in South Australia or Tasmania) that they will probably be able to waive the stamp duty just for their very first ownership, especially if they plan to move in and live there.
The third concern is your pension. If you have already qualified for and are currently receiving an age pension, losing ownership of your house without acquiring a new “reasonable” home arrangement could put your pension at risk.
The final financial consideration is the title transfer. Making any changes to a title, including gifting, requires the help of a professional conveyancer who understands the complex laws and processes surrounding legal property management. Be prepared to pay the conveyancer fees along with the possible cost of a value assessment to determine what the CGT and stamp duty will be based on.
Inheritance and a granny flat
It is much easier and less expensive for everyone to pass on property ownership through inheritance rather than direct transfer, but this leaves you as the official owner of the house. However, if the goal is simply to give your child somewhere to live that they can control without paying rent, you can simply hand them the keys to the family home and downsize in place. This will maintain your pension status and prepare your child to take over when you do finally pass the property on the traditional way. If you will enjoy living with them and their new family, this can be a very friendly arrangement.
Accepting the CGT and stamp duty
The primary problem with gifting a property is that it’s not actually free. The government takes their cut on both sides of the equation, even if your child doesn’t actually pay you for the house. However, you’re also giving them an amazing gift by giving your child the opportunity to acquire a home they already love. The combination of the capital gains tax and stamp duty is much less than the actual cost and your child might pay the entire processing cost instead of the house price or, if you still want to help out, you can split the costs together. As for your pension, you can either arrange to have ‘granny flat interest’ or set yourself up somewhere smaller and more convenient for retirement.
Joint or in-common title sharing
Another interesting option that would be to engage in one of the more unusual title arrangements with your child. Rather than transferring the entire home into their name, you could give them fifty percent or more as a Tenant-in-Common or add them as a joint tenant with equal shares in the whole property. With a joint tenancy or fifty-percent tenant-in-common title, your child would have legal right and control over the property while the two of you will only have to pay about half of the CGT and the stamp duty. This allows you to cut the costs of the gift while still achieving the majority of your goals.
With a joint-tenant title transfer, your child will own the property with equal rights to your own and, interestingly enough, they will inherit automatically when you die, such that the house never even enters your estate. Normally this is how property ownership works with married couples but you can legally make this arrangement with anyone.
Alternately, with a tenant-in-common title transfer, you determine the percentage of the property you’re gifting to your child and maintain a percentage for yourself then the two of you only pay taxes on the portion you gave to them. When you die, your percentage will need to be willed to someone but technically your property beneficiary doesn’t need to be the child you share the home with and willing your share to someone else will keep it in dual-ownership.
Managing a property title and the costs involved can be complicated, but it doesn’t have to stop you from reaching your goals. If you want to gift your family home to one or more of your children, this is entirely possible and, if done carefully, you should be able to minimise the expenses and find a solution that makes everyone happy.
Gerard Healy is the managing director at Titlexchange.