Parents often want to help their children enter the property market. Some even consider giving one of their properties to their children. However, doing this has several implications and parents must choose the right strategy for them. Chan & Naylor Tax Accountants Brisbane talk about it in detail.
Are you aware that even when you just give away your property as a gift, the tax department can still collect its share of taxes? When you pass assets upon death, capital gains tax and stamp duty are free but both are applied pre-death. The market value will be used to calculate the taxes even when you did not earn from it and declare “zero” gains to reduce taxes. Another consideration is that a will can be contested on death so your assets may not end up with the right people.
Here are some practical ways to help your children enter the property market:
First, you can gift funds for a property deposit and cost for adult children. However, they will be responsible for the loan. You also have the option to gift more funds if the bank won’t lend the full amount. This way, the property will be owned by the child, subject to family law court or asset protection disputes. To avoid such issues, you could lend the funds instead of gifting it. In case of bankruptcy or family issues, you could recoup the loan but the bank will assess the serviceability and may think it’s too risky.
Some parents guarantee a higher loan to avoid passing over any funds but in case of a default, you will be liable for the full amount and lose your security, such as your family home. Limit the guarantee to the minimum amount required and arrange for refinance when property value grows so you can be removed as a guarantor.
You can also buy a property in the name of your minor children with notations on the title. You will be their legal personal representative who will be responsible for managing the property. By the time your child turns 18 years of age, you need to prove the child is still alive so the government will change the title. There will be no CGT or stamp duty when you change the title. However, minor tax may apply.
For tax deductibility of the interest expense on the debt, the debt must be in the name of the minor child and that the property was used as an investment. Before the child reaches 18, the court would need to approve in case it gets sold and it could not only be costly, but difficult as well.
Among these strategies, the best one could be using a trust. You can use a family trust to buy a property and be the trustee of the trust. It could be cash flow positive especially for business owners who can even negatively gear the property in the family trust and get the tax benefit with the right business structure. There will be no CGT or stamp duty when you pass control of the trust to your adult child and you can protect the asset in case of a family dispute or your child wants to go on a spending spree.
The trust may also be handed down from one generation to the next as normal trusts stop after 80 years. You can set up a trust that does not end but make sure it has adequate asset protection safeguards. This way, the child does not own the property in his or her personal name but can control it through the trust.
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Whether you are a beginner, seasoned investor or business owner, our property and business tax accountants can give you guidance to maximise the financial areas of your life. We can also give you an integrated and tailored solution for your superannuation, taxation, property investment, asset protection, estate planning and more.
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