Alan Hartstein
Athena Cocoves
In the face of an increasingly demanding real estate market for young people to enter (especially in larger metropolitan areas), many Australian families are looking for creative ways to get their hopeful first time buyers on the property ladder. One way some parents help is by transferring property. For those fortunate enough to consider such an option, the easiest method is by gifting property to children.
Ways of transferring a property in Australia
In Australia, transferring land or property ownership from one person to another can be done in one of four ways:
- selling the property
- giving it away as a gift
- leaving it to someone in your will as an inheritance
- transferring it to a trust.
It may be embedded in people’s psyches that children only inherit the family home or some other property from their parents’ last will and testament, and traditionally, that has been the case.
However, under Australian law, nothing stops someone from giving someone else a property — or anything else for that matter — as a gift.
Purchasing vs gifting property
When you purchase a property in Australia, you receive a certificate of title, an official document confirming your ownership of land. It also outlines your rights and responsibilities, including details such as ownership and any debt owed on the property.
When gifting or giving away property, there’s no requirement to draw up a contract of sale or for either party to hand over any funds. Instead, a gift deed may be required, which allows you to voluntarily transfer ownership of the property.
» MORE: How to buy a house in Australia
How does gifting property to children work?
A gift deed, also known as a deed of gift, can be used to transfer money or assets from one person to another, usually from a parent to a child, or to make a charitable donation. A gift deed is one of the most convenient ways of transferring property to family — especially when the donor wants to gift it to the beneficiary without any conditions imposed.
The gift deed can also serve as an essential piece of documentation for both parties should any complications arise. For example, if the donor dies suddenly and other family members want to dispute what their true intentions were. A gift deed legally transfers ownership from the donor to the recipient, so there should not be any conjecture in this regard.
If the gifted property has an outstanding mortgage, the lender usually requires the new owner to assume responsibility for the outstanding debt. So if, for example, a parent gifted a property to a child worth $800,000 and there was still an outstanding mortgage of $150,000, the child, as the gift recipient, would be required to take out a mortgage for that amount.
Pros of gifting property to children
Huge financial advantage
It goes without saying that giving a young person a property is a massive financial boom — especially if they’re struggling financially or are caught in a never-ending rent cycle. By transferring property through a gift, the recipient avoids all the hassles that most people must endure trying to enter the property market. More importantly, it provides them with a valuable asset that can be used as a launching pad to build wealth.
Sidestepping the probate process
Giving your property to your children while you’re still alive could be a great help to them if it can avoid at least some of the rigmarole involved with the probate process, where the beneficiaries of a will can wait for anything up to a year or even beyond for the proceeds to be distributed.
Removal of doubt
By gifting their property through a gift deed, the owner clarifies their intentions as to who should receive it. A lack of clarity could otherwise become an issue, especially if there is any conjecture in the will’s wording.
Cons of gifting property to children
Paying stamp duty
States and territories levy stamp duty on property transfers, even if they result from a gift. While each jurisdiction may differ slightly, they all require a payment from the new owner when the title changes hands.
Stamp duty is also generally charged as a percentage of the property’s real value — not the sale price or the amount someone gave it away for. Some exemptions exist, but you should talk to an expert — such as a conveyancing solicitor — if you have any doubts.
It’s also worth noting that stamp duty is not payable on properties bequeathed in wills.
Tax implications
In Australia, gifts and inheritances are not considered income and, therefore, do not attract Federal taxation. As the owner, however, you may very well be subject to capital gains tax (CGT) on the property you’ve just given away.
CGT is usually calculated based on the profit made. So, if you bought a property for $400,000 and sold it for $1 million, you’d be liable for CGT on the $600,000. Unfortunately, the Australian Taxation Office assesses CGT on the property’s value at the time of transfer, not what you received for it.
There are plenty of exemptions, such as CGT not being payable on a principal place of residence or property purchased before September 1985, but once again, it’s worth consulting a professional. They can also inform you if you must pay additional state taxes, such as NSW’s land tax.
Issues for pensioners
If you decide to gift your property and receive a pension, it could affect you because Centrelink, like the ATO, assesses the income from a transfer based on the property’s value.
Centrelink also has fairly strict guidelines regarding the disposal of assets for pension purposes. So, if you are unsure how you’ll be affected, you should talk to Centrelink.
Potential mortgage debt
Your family member who is trying to do the right thing by you may have left you with some debt, or mortgage, still hanging over the property. You will have to repay this debt once you assume ownership, which may be a challenge if you haven’t budgeted for this cost.
You’ll also have to go through all of the nonsense associated with mortgage approval, which will be time-consuming, especially if you’ve never had one. The donor also needs to consider whether their beneficiary can afford a mortgage if required.
Other costs and ongoing expenditures
As both the owner and the recipient, you may need to factor in other typical costs associated with buying a house. This may include solicitor fees to draw up transfer titles and other required documentation, as well as a valuation of the property for insurance or taxation purposes.
You’ll also need to factor in all of the ongoing expenditures associated with home ownership, in addition to any mortgage repayments, such as rates, maintenance and insurance.
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