This article focuses on the tax and legal implications when you gift or transfer property to a family or friends.
Reasons to transfer property
There are many reasons why family members transfer property to other family members and some of the common reasons:
- Inheritance as part of the will
- Include the husband or wife on the title of the property
- Give a family member equity so they can use it to purchase their property
- Parents want to sell their existing property portfolio to their kids to access their money early while helping their kids to get their foot into the property market
Are there any tax implications?
Transferring property to family or friends may trigger a capital gain (CGT) event.
If you gift or transfer property to family or friends or sell it to them for less than market value and you’re not entitled to the main residence exemption for the property – or you’re entitled to only a partial exemption, then CGT will apply.
This is applicable even if you do not receive any funds for the property as the ATO will treat it as you have taken to receive its market value at the time you disposed of it.
You may also be taken to have received the market value if:
• What you received (your capital proceeds) was more or less than the market value of the property, and
• You and the new owner were not dealing with each other at arm’s length.
What value do you use if a family member gives the property and does not receive any physical monetary benefit?
If you’re selling a property to a family member or a related party, you may obtain a valuation from a professional valuer, or a reputable real estate agent to work out the market value or you are using reasonably objective and supportable data.
E.g., This can include the price paid for a similar property sold at the same time in the same location.
In these cases, the property’s market value on the day of the transfer replaces what you received for it.
Example: Selling a property for less than market value
Mary owned a rental property. The lease on the rental property was due for renewal and she owed only $100,000 on the mortgage. Mary offered to sell the rental property to her son for the balance owed on the mortgage. Her son accepted the offer and purchased the property for $100,000.
Mary obtained a market valuation from a professional valuer. It showed the value of the property at the time of transfer was $300,000. Therefore, despite Mary selling the property for $100,000 which is the value of the existing mortgage, the $300,000 market value is his capital proceeds when calculating his capital gain or loss.
Is capital gain tax applicable if you add a spouse to an owner-occupied property?
This is more complicated because it depends on whether a property is considered to have been disposed of under the CGT rules and whether you are entitled to any CGT exemption such as the main residence exemption.
- If the property was initially purchased as an investment, then this is considered a capital asset which means if there is a change in ownership i.e., adding your spouse to the title, it will trigger a CGT event even if you do not receive any monetary benefit
- If the property was initially purchased as owner-occupied, then you may be exempted from this if you are entitled to the full main residence exemption.
Are there any special rules with Capital Gains Tax?
There are special rules that the ATO afford to property owners.
If you transfer real estate to:
• your former spouse on the breakdown of your marriage or relationship, the rules above may not apply
• the trustee of a special disability trust for no consideration, any capital gain or loss is disregarded.
• If you acquire the asset before 20th September 1985 which is the date when CGT came into effect. Any property or assets that were acquired before this date may be exempted from CGT rules.
• The property is the primary place of residence when it was purchased and at the time the property is sold
• A property investor who has owned an investment property for more than 12 months is entitled to a 50% discount on the CGT
• A 6-year rule is where if a property owner moves off their primary place of residence and converts it to an investment, the property owner might be entitled to an exemption for a period of up to 6 years.
Key Takeaway
Working out your true tax position is a complicated process so it is highly recommended that you should seek professional tax advice if you are considering transferring assets to family and friends.
General Advice Warning
The information provided on this website is general only and it does not consider your personal needs or circumstances into consideration. Before acting on any advice, you should consider whether the information is appropriate to your needs and where appropriate, seek professional advice about legal, financial, taxation, mortgage, or other advice.
