Keeping real estate in the family: the tax traps

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As more and more first home owners get locked out of the property market, many older generations are looking at selling their own home to their family members to help them get their start. While it’s a very generous gesture, did you know that it could create a huge tax liability for the seller?
 
Australia’s bumper property market is great news for those already in the market, but for those hoping to buy their first home, ever-increasing house prices are standing in their way of entering the market.
 
As a result of rising house prices, coupled with Australia’s ageing population, more homes are being sold between family members to help smooth the path for younger Australians into their first home.
 
However, before generous parents and grandparents look at selling a property to their children, they need to understand the tax implications involved, warns Peter Bembrick, a partner at Taxation Services, HLB Mann Judd Sydney.
 
A family with an investment property worth $300,000 can sell it to another family member for whatever amount they like – for example, $150,000.
 
But in cases such as this, any capital gains tax (CGT) payable is calculated on the market value of the property, not the sale price –meaning the seller may be liable to pay extra tax.
 
According to Bembrick, a homeowner that is selling their primary residence to another family member would not required to pay CGT on the property sale, as principal places of residence are exempt.
 
“CGT only becomes a problem if families sell an investment property to another family member for less than the market value,” Bembrick says.
 
"You need to be aware that stamp duty is also charged on the value of the property, not the sale price. So in the example above, NSW stamp duty of $8,990 would apply on the full value of $300,000."
 
Bembrick warned that people thinking about transferring a home to a family member should seek professional financial advice about any relevant taxation liability before they proceed. 
 
Adds Angus Raine, CEO of Raine & Horne, “Capital gains tax is quite complex, and buyers and sellers must be aware of this when they enter into intra-family property transactions. While it might make sense for families to pass on a home or investment property to other family members, it’s important to check whether a capital gains tax liability might apply.”

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