It is not uncommon to see family wanting to help other family members by either gifting money or by transferring real estate. This may sound like an easy and simple step however there are other tax and legal considerations you must factor in before proceeding.
For the purpose of this article, we are only focusing on capital gain tax when you give a property to family effectively changing ownership on the title deed.
Why do family transfer real estate assets to other family members?
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
- To include the husband or wife on to the title of the property
- To give a family member equity so they can use it to purchase their own 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
- Forms part of the long-term tax strategy
Is there any capital gain with transferring property to family?
When giving property to family or friends, this may trigger a capital gain tax (CGT) event. This includes:
- If you give a 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 receive ‘zero’ dollars 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.
Furthermore, 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.
You are said to be dealing at arm’s length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. This takes into account the relationship and also the quality of the bargaining between the two parties.
What value do you use if a family member gives the property and not receive any physical monetary benefit?
Non-Arms Length Transaction
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 yourself using reasonably objective and supportable data.
E.g. This can include the price paid for a very similar property that was sold at the same time in the same location.
In these cases, the market value of the property on the day of the transfer replaces what you received for it.
Example: Selling a property for less than market value
John Citizen owned a rental property. The lease on the rental property was due for renewal and he owed only $100,000 on the mortgage. John offered to sell the rental property to his son for the balance owing on the mortgage. His son accepted the offer and purchased the property for $100,000.
John 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 John 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 a more complicated question because it depends whether a property is considered to have been disposed of under the CGT rules and whether you are entitled to any CGT exemption such the main residence exemption.
- If the property was initially purchased as an investment then this is considered as a capital asset which means if there is a change in ownership i.e. adding your spouse on title, it will trigger CGT event even if you do not receive any monetary benefit
- If the property was initially purchased as an 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 CGT?
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 – see Relationship breakdown
- 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 prior to 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 are entitled to 50% discount on the CGT
- A 6-year rule which is where if a property owner moves of their primary place of residences and converts it to an investment, the property owner might be entitled to an exemption for a period of up to 6 years.
How is CGT calculated?
If you’re selling an investment property, the CGT calculation is based on the sale price of a property minus your expenses.
These expenses are called your cost base.
The cost base: (Original purchase price + Ancillary cost + ownership cost + title costs) – (government grants and depreciable items).
- Ancillary costs – stamp duty, legal fees, agent fees and advertising and marketing fees.
- Ownership costs – rates, land tax, maintenance and interest on your home loan. Note that you can only add rates, land tax, insurance and interest on borrowed money to your cost base if you acquired the property after 20 August 1991, or didn’t use the property to produce an assessable income e.g vacant land or main residences.
- Improvement costs – replacing kitchens, bathrooms or any other improvements you’ve made on the property
- Title costs – legal fees associated with organizing your title on the property
Sale price – cost base = Capital gain or loss
The above capital gain is then adjusted according to:
- The time when you owned the property that it was rented out and not your main place of residence.
- If you’ve held the property for longer than 12 months and therefore are eligible to receive a 50% discount.
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.
Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.