The Bank of Mum and Dad is one of Australia’s biggest lenders, a testament to the generosity of parents helping their children navigate an increasingly unaffordable property market. However, as well-intentioned as this help may be, it is a financial minefield, and emotional decisions without legal and financial advice can lead to costly mistakes—potentially hundreds of thousands of dollars in losses.
Here are five key traps to avoid when entering into intra-family property transactions:
- Tax Pain on Transfers and the $1 Misconception
One of the most common misconceptions is that a property can be transferred to a child for a nominal sum, like $1. This is often not possible. When transferring investment properties to children, parents can incur both capital gains tax (CGT) and stamp duty. The Australian Taxation Office (ATO) will assess the CGT based on the property’s market value, not the sale price, and stamp duty is calculated on the higher of the sale price or market value. Failing to get advice before signing transfer documents can lead to unnecessary tax bills.
- Forfeiting First-Home Buyer Incentives
Parents can unintentionally cost their children tens of thousands of dollars by forfeiting first-home buyer entitlements. This often happens when parents, perhaps for inheritance reasons, place a family property into the child’s name while the child is still saving for their own first home. This oversight immediately costs the child access to valuable incentives, including grants, deposit assistance, and stamp duty concessions, as they no longer qualify as a first-home buyer.
- Undocumented Deposits and Relationship Breakdowns
Lending or gifting a substantial cash deposit without legal protection is a critical mistake. If a generous gift is not protected by a binding financial agreement or documented as a formal loan, that money becomes a matrimonial asset. In the event of the child’s marital or de facto relationship breakdown, the gift is fully exposed to the courts and can benefit the former partner. Legal advice is crucial to draw up formal agreements that deliver certainty about who gets what.
- The Ramifications of Going Guarantor
While gifts cause problems, parents going guarantor for their children’s mortgages introduce another set of pitfalls. In a worst-case scenario, if the child defaults on the loan, the parents could potentially be forced to sell their own home. Additionally, parents who put up their property as a guarantee can be inhibited when trying to make their own financial moves, as a bank may refuse them a loan while they remain a guarantor, and their own credit rating could be affected by their child’s actions.
- Investment Property and Granny Flat Tax Traps
Tax traps extend to investment properties and estate planning. If you allow a family member to live rent-free in an investment property (even after initially renting it at market rates), this can trigger significant tax implications. Similarly, while allowing children to live rent-free in a granny flat is generally fine, if they start paying rent, it can jeopardise the main residence exemption status for the family home. Instead of rent, it’s safer for children to contribute to household bills or utilities.