Do I have to pay tax if I sell my investment property to my son?; Can I rent my granny flat to a relative and not pay tax?
I am a self-funded retiree receiving defined benefit benefits of approximately $120,000 per year. Three years ago, I purchased a small investment property for $610,000 with the intention of eventually passing it on to my son. The mortgage balance is currently $495,000. The property is valued at approximately $725,000 and my son is financially stable and able to pay the mortgage.
My plan is to sell the property to him for about $50,000 to cover the mortgage amount plus my original purchase expenses. In fact, I will gift him roughly $175,000, which will allow him to sneak in. Sydney property market. Are there any tax or other consequences for me doing this?
The main tax issue for you will be capital gains tax. Based on the figures you provide, the capital gain should be relatively modest. After factoring in buying and selling costs your gain could be around $100,000, which will be reduced to $50,000 after the 50 per cent CGT discount is applied. This net gain will be added to your taxable income in the year the sales contract is signed.
Once the sale is completed, your current mortgage will end and your son will need to arrange his own financing. I recommend working with a mortgage broker to ensure you get the most affordable loan and the best interest rate possible.
My husband, 66, and I, 68, are retired and receive part-age pensions totaling $18,400 per year. We jointly own an investment property that was purchased eight years ago for $345,000 and which we expect to sell for approximately $700,000. There is a $230,000 outstanding mortgage. We understand that capital gains tax will apply and we would like you to explain how the gain will be calculated in our case, including the impact of joint ownership and CGT relief, and provide a broad indication of the CGT that may be payable.
The net proceeds after the sale will contribute to my wife’s retirement. I currently have $373,000 and my husband has $85,000. Are there any taxes or super impacts we should know about?
You definitely need expert advice here because there are certain strategies that will help you reduce the CGT payable. Assuming a net taxable capital gain of $340,000, that figure would drop to $170,000 thanks to the 50 percent deduction.
Since the home is jointly owned, 50 percent of this will be added to each of your taxable income in the year the contract is signed. Given that you both have pensions under $500,000, you may be eligible to use the catch-up contribution strategy, which allows you both to make more tax-deductible contributions to retirement than usual.
However, because you are over the age of 67, to qualify you will need to pass the employment test, which involves working at least 40 hours for 30 consecutive days in the financial year in which you plan to contribute.
Most skilled retirees have no problem qualifying. Just be sure to talk to your accountant. There’s a significant amount of money at stake here, and you can’t afford to get it wrong.
Are assets considered net for the old-age pension asset test? For example, if you have an investment property with an outstanding mortgage, is the loan deducted from the current value of the property?
Provided that the loan is secured by a mortgage on an investment property, the value of the property is reduced by the amount of the outstanding loan for asset testing purposes. This will not apply if the loan is secured against an exempt asset test, such as your home.
Can you explain how an approved secondary development located on the site of your main residence, specifically a 60 square meter detached granny flat, will be assessed by Centrelink for calculating the pension under both the assets and means tests? How does this treatment differ depending on whether the granny flat is rented out to tenants versus used as a guest house for free by family or friends?
The team at Services Australia told me that the granny flat would be included in the income and assets test if the building was rented to someone other than a close relative.
If the granny flat is vacant or rented to a close relative, it is not included in the income and assets test. The situation is the same if the retiree does not pay for the building and the person paying lives there.
Noel Whittaker is the author of: Retirement Made Easy and other books on personal finance. Questions: noel@noelwhittaker.com.au
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Noel Whittaker, AM is the author of Make Money Made Simple and numerous other books on personal finance.Connect with: X or email.
