Selling Property to Family: A Generous Act with Hidden Pitfalls
In the current economic climate, many Australians are grappling with rising living costs. For some, this means exploring creative ways to help family members, particularly younger generations, break into the notoriously challenging housing market. One such strategy involves selling a property to relatives at a significantly discounted price. While this gesture of generosity can be incredibly helpful, an expert has sounded a cautionary note, warning that such arrangements can sometimes lead to unexpected financial complications, potentially even leaving parents reliant on their children for financial support later in life.
Chris Strano, founder and chief executive of Super Guy, highlights that selling a property below market value to family can offer immediate benefits. It can circumvent the usual costs associated with selling, such as agent commissions and marketing expenses. More importantly, it allows homeowners to transfer wealth to their loved ones while they are still alive, enabling them to witness their child’s benefit firsthand. “This enables you to see your child benefit from your support and share in that experience, rather than transferring assets only after your passing,” Mr Strano explains.
However, beneath the surface of this benevolent act lie significant financial risks that potential sellers and buyers must be aware of.
The Tax Man Cometh: Capital Gains and Stamp Duty
A major hurdle arises from the Australian Taxation Office’s (ATO) market value substitution rules. These rules stipulate that Capital Gains Tax (CGT) is calculated based on the property’s market value at the time of sale, not the discounted price agreed upon between family members. This means that while the seller receives less cash from the sale, they will still be liable for CGT as if the property had been sold at its full market worth.
Furthermore, Mr Strano points out that the buyer, even in a family transaction, is typically required to pay stamp duty. This duty is also usually assessed on the property’s market value, not the reduced sale price. This can add a substantial unexpected cost for the family member purchasing the property.
Retirement Repercussions: A Threat to Financial Security
The risks are amplified for individuals who rely on their investment properties to fund their retirement. Selling an asset at a considerable discount could jeopardise their ability to meet long-term financial goals. “Selling at a lower cost could affect your ability to meet your longer-term retirement objectives and may see you run out of money – especially if your super and other investments were to take a downturn,” warns Mr Strano. He adds, with a stark warning, “You may find yourself asking your kids for financial help down the track.”
Familial Fairness: The Equity Conundrum
Beyond the direct financial implications, there’s also the delicate issue of equity among siblings. If a parent gifts a property at a reduced price to one child, it can create a perception of unfairness among their other children. “If you have multiple children, providing a property at a reduced price to one child may create perceived inequity,” Mr Strano advises. “Consideration should be given to how this will be balanced across your broader estate planning arrangements.”
The Upside of Divesting: Five Key Benefits of Selling Investment Properties
While the thought of selling an investment property to fund retirement might seem daunting, involving potential capital gains tax implications, loss of future returns, and sale costs, Mr Strano outlines five key benefits that can outweigh these concerns:
Reduced Risk: For many retirees, investment properties represent a significant portion of their wealth. By selling, individuals reduce their reliance on a single, large asset to generate the returns needed for retirement. Even if a property has performed well historically, unforeseen market shifts, such as a substantial drop in property prices, declining rental income, unexpected maintenance costs, or prolonged periods of vacancy, could significantly impact retirement plans. Selling converts this large, potentially volatile asset into more liquid and manageable funds.
Enhanced Liquidity: Retirement expenses typically involve a combination of investment income and a drawdown of capital. While managing this drawdown is straightforward with assets like shares or managed funds, where small parcels can be sold as needed, it becomes impractical with property. “This is impossible to achieve with property because you are unable, for instance, to sell the bathroom to free up some capital and keep the remainder of the house,” Mr Strano explains. “What if you wanted to spend $50,000 on a new car, caravan or holiday? You can’t just sell the living room.” Selling a property provides the necessary capital flexibility.
Diversification of Investments: Offloading an investment property allows retirees to reinvest the proceeds into a portfolio that is better aligned with their risk tolerance and financial needs in retirement. This could mean a portfolio designed for more steady returns, lower fluctuations, and greater certainty in achieving financial objectives, rather than being tied to the performance of a single property market.
Potential Tax Advantages: In certain circumstances, selling an investment property can lead to paying less tax. This is particularly true if the sale occurs in the financial year immediately following the last year of earning work-related income. “It could mean less capital gains tax, depending on your other sources of taxable income for the year and how much of the proceeds you are able to contribute to super,” Mr Strano notes. Furthermore, contributing the sale proceeds to superannuation can potentially reduce future tax liabilities.
- Reduced Stress and Hassle: Managing an investment property can be a source of considerable stress, involving dealing with tenants, real estate agents, advertising, and ongoing maintenance, not to mention the associated costs. Shares and managed funds, in contrast, are generally more passive investments. Selling an investment property can free retirees from these managerial burdens, allowing for a more relaxed and enjoyable retirement.
