Historically, many well-to-do parents have shown largesse in granting their children ownership of portions of their significant property holdings but if you’re wondering whether “selling my house to my child” is a prudent move for you, read on.
These days, with young people finding it ever harder to get a foot on the property ladder, even parents with quite modest means are acting to give their offspring a boost by selling their own homes to them.
To give their child or children the greatest advantage, the temptation for a parent or parents is to sell their house to them at well below market value.
They may even give the child their house, but the child must still pay government fees and taxes on the lowest acceptable valuation, i.e., the council valuation.
Selling my house to my child: The importance of market value
Apart from the moral issue of their parents’ wealth being diminished by such generosity, it can cause problems for the children with stamp duty and capital gains tax and for the parents by reducing or even nullifying their Centrelink Age Pension entitlements, all of which are calculated on the home’s market value (usually as assessed by a professional valuer).
Don’t be tempted to try to ‘fudge’ the market value of the property. The risk of incurring penalties for doing so is not worth the money you might save.
By contrast to the selling scenario, no stamp duty is payable should a child inherit their parent’s house as the beneficiary of their will.
A compromise—the granny flat right or interest
An alternative way of a parent or parents selling their home to their child is via an arrangement called a granny flat right or interest (Australian Department of Human Services), in exchange for the right to use accommodation (usually separate and self-contained) for life on the property or on another private property.
This arrangement has a number of variations to which differing rules concerning tax liabilities and age pension entitlements apply.
Because the parent is deriving a benefit (i.e., the lifetime right to live in accommodation on the property) from the sale of their house to which a value can be attributed, they can sell it to their child at something less than market value without incurring the same penalties as they would for an unencumbered sale.
Selling my house to my child: Some words to the wise
To repeat my by-now-familiar mantra, I urge you to consult a qualified financial adviser before making this or any other major financial decision.
They can advise you on the financial, taxation and other ramifications of selling your home to your child, selling it to them with a granny flat right or interest, and may well suggest other alternatives to suit your needs.
The individual situations of parents wishing to sell their homes to their children vary greatly, with one or two parents wanting to sell their house to one or more of their children.
If the outcome of the sale is that multiple siblings jointly own their parents’ former house, there may be disharmony down the track if some but not all of them wish to sell the property or to have their share of it bought out by the others.
Please think through the long-term consequences of whatever decision you make and, for your own sake and that of your children, ensure that all arrangements are properly and legally documented and registered.
Many families have learnt from bitter experience that disputes arise over property ownership, even among siblings who normally get on well, especially once they have lost the moderating influence of their parents.
Where do we come in?
Over the past 45 years, we at McGrath Real Estate have worked on every type of sale arrangement you could imagine.
We know the property market in Adelaide’s western and coastal suburbs as only people who live and work here can.
We’d be happy to talk to you about your selling plans and offer you the benefit of our experience to help you with your decision-making.