‘Shock and disbelief’: The pitfalls of buying property with your children

Fifteen years ago, we paid a 30 per cent deposit on a house for our daughter. In fairness to our other two kids, who had not received the same gift, we bought the house as “tenants in common” with our daughter.

In other words, we own one-third and our daughter owns two-thirds. We have since completely repaid her loan, and we now wish to transfer our one-third to our daughter.

You can imagine our shock and disbelief when we discovered that we have to pay capital gains tax on the growth in our one-third. We were under the impression that, by us completely paying out the loan, it would be added to our cost base for CGT purposes. Wrong again.

Do you have any suggestions on how we should jump in this grossly unfair situation? It turned out to be a very expensive gift.

There is no easy answer here, but your example does show readers the importance of getting advice before entering into an irrevocable real estate transaction such as this. Repaying the loan does not change the fact that you own one-third of the property, nor does it simply increase the cost base of that one-third. Transferring your share to your daughter is a disposal for CGT purposes, based on its market value, even if no money changes hands.

The lesson for all parents who wish to help their children is to think very carefully before putting their own name on the title deed. What looks like a sensible way to help a child and keep things fair between siblings can ultimately create substantial tax and transaction costs.

I’m hearing whispers that the new minimum 30 per cent tax applying after July 1, 2027 to capital gains accruing after that date cannot be reduced by making a concessional contribution to superannuation. If CGT is not a separate, standalone tax, but simply forms part of my taxable income, how can that be?

I’m becoming increasingly concerned about the possibility of a substantial market correction before the new CGT rules commence. If that happens, it could reset the cost base of our shares at a much lower level.

Even if the market recovers quickly, we could then face significantly higher CGT liabilities on gains made from that depressed value after July 1, 2027. And that’s on top of the minimum 30 per cent rate, which effectively taxes us as though we were in a much higher tax bracket.

I find the whole situation particularly frustrating, certainly not equitable and, above all, deserving of far more media attention than it is receiving.

This is a bit complex, but in some cases a deductible contribution to super or a tax-deductible donation can reduce the overall CGT paid. Suppose you earned $135,000 a year and made a taxable capital gain post-June 2027 of $50,000 after all indexation adjustments. The minimum 30 per cent tax on the gain would be $15,000. The gain would be added to your taxable income in the year the sale document was signed and would push part of your income into the 37 per cent bracket.

If you then made a tax-deductible payment of some kind, such as a deductible contribution to super or a tax-deductible donation, you could reduce your overall taxable income back to $135,000 and save paying the excess tax between the 30 per cent bracket and the 37 per cent bracket. What you cannot do is use that deduction to reduce the minimum 30 per cent tax payable on the post-June 2027 capital gain itself.

I partially retired at 57 and turned 60 last year with $650,000 in choice super. At 60, I am still playing around with a real estate portfolio and a small subdivision. While I had expected to have enough cash to complete the development, I was thrown a curve ball by many unexpected costs. In short, I withdrew $200,000 from my super, dropping the balance to $450,000 and putting me back below the top-up threshold.

Upon completion of the development, I would like to put the $200,000, plus another $300,000, back into my super. Given my balance was originally $650,000, do you have a view on whether this would be possible if I still have catch-up contribution headroom? I also borrowed $500,000 from a non-top-tier institution at around 10 per cent interest, with some hefty establishment fees.

Can the cost of this type of borrowing, including the establishment fees, be added to the cost base when I sell? It’s been 20 years since I have done this type of small development, and if the government would like to know why land is so expensive, it need only look at its development costs and fees.

You are confusing the catch-up rules, which apply to concessional contributions, with the bring-forward rules for non-concessional contributions. Your super balance is well below the relevant limit, so provided you meet the normal eligibility requirements and have not already triggered the bring-forward provisions, the simplest approach would be to use three years’ non-concessional contributions and contribute up to $390,000 immediately. You could then contribute the remaining $110,000 once that three-year bring-forward period has expired.

What looks like a sensible way to help a child and keep things fair between siblings can ultimately create substantial tax and transaction costs.

As for the development, borrowing costs such as interest and establishment fees may be deductible or may form part of the cost of the development for tax purposes, depending on the circumstances and how the development is treated for tax. You cannot claim the same expense twice. Any costs that are properly included in the cost base and have not already been claimed as a tax deduction can ultimately reduce the taxable gain on sale. Given the amounts involved and the possibility that a development of this kind may be taxed as ordinary income rather than under the CGT provisions, this is one for your accountant before the sale takes place.

I have an investment property and, perhaps foolishly, thought I could simply get my managing agent to provide a valuation if I decide to hold the property after the new CGT rules commence. I have since heard that I will need to obtain a formal, paid valuation to meet ATO requirements.

I can’t imagine the nightmare this will create, given the number of investment properties, the limited number of valuers and everybody trying to obtain a valuation as close as possible to June 30, 2027. Is this the case?

Also, regarding shares, what will be required to establish their value at June 30, 2027 so that I am taxed under the new rules only on the increase in value after that date?

You are correct. If you want to establish the market value of your investment property at June 30, 2027, you will need a valuation by a registered valuer. Alternatively, you can rely on the ATO’s reverse-indexation method, which may or may not work in your favour. Having an official valuation gives you more options.

Given there are around 2.2 million investment properties and only about 6000 registered valuers, you are certainly right about the potential for a panic. The good news is that you don’t need to have the valuation done at June 30, 2027. It can be done retrospectively to establish the value at that date.

Shares are much simpler. For listed shares, the market value at June 30, 2027 can be established from the quoted market price on that date, so there is no need to obtain a separate valuation.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Email: [email protected]

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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Noel Whittaker, AM, is the author of Making Money Made Simple and numerous other books on personal finance.Connect via X or email.AdvertisementAdvertisement