Purchasing Property From A Relative Is Simple, Right? WRONG. Here Are 6 Crucial Questions You MUST Consider
Throughout history it has been common for families to keep assets within the family circle and sell onto other family members in need to help them out and make things more economical and straight forward for all the parties involved. Assets like cars and jewellery are regularly passed down or sold on for a reduced price, and there is little to no red tape involved in these processes. What, though, about real estate? As well as property being included in Wills, an increasingly regular occurrence, perhaps in the face of ever rising property prices and a notoriously difficult to enter property market, family members are selling their property to their relatives.
This is particularly so with parents transferring either entire property or parts of property or land to their children at a reduced price to help them get a start in property ownership. While in theory this seems like a foolproof idea that is basically a cost-effective no brainer, there are several things people need to know before going ahead with any agreements or purchases. Below are some frequently asked questions regarding buying a property from relatives.
1. What Are The Legal Implications Of Intra-Family Real Estate Sales?
Unfortunately, selling property to family isn’t devoid of paper work and, as with all real estate transactions, it does come with a host of legal implications and documentation, though it is relatively easy to cut down on this. The best way to reduce paperwork, red tape and unnecessary costs is to file the transaction as a ‘transfer’ rather than a ‘sale’. This doesn’t mean paperwork can be avoided entirely, and it is highly recommended that every aspect of the transfer is officially and formally documented, and that some form of Contract of Sale is drawn up to be safe. It is also advisable for both sides to consult individual solicitors before sealing any deals.
2. I Trust My Family, So Why Do I Need To Make It So Official?
However much you unconditionally love and trust your family members, even the closest, most tight knit families have, somewhere down the line, fallen out, and depending on circumstances, fall outs can end up being incredibly nasty and result in an array of complications. Basically, even if your situation is presently the best in the world, life and people are unpredictable and you can never guarantee that everything is going to go swimmingly in the years to come, so documentation is necessary to avoid potential future legal problems relating to property.
3. Can You Pay Directly To A Relative To Minimise The Loan Amount?
This can be done via a private “owner-financed” sale whereby monthly payments are made to the previous owner directly rather than to an external lender, therefore saving a considerable amount of money on interest.
4. When Wouldn’t I Have To Pay For Stamp Duty?
It is generally impossible to avoid paying stamp duty on real estate sales or transfers, even when they are between family members, but there are a few rare exceptions to this rule. Exemptions include:
- A gift of the family home from a spouse into the joint names of the spouses. For further details, refer to the application
- A transfer of a family farm between members, family companies and family trusts. For further details, refer to the application
A form must be filed with the state revenue office declaring the transfer and the full details of both involved parties as well as the property itself. Property or land inherited through a Will are also exempt from stamp duty.
5. Do I Need To Engage A Valuer?
By law, the property in question needs to be market valued for stamp duty and capital tax gains purposes. The quickest and easiest way to do this is to hire a professional valuer who will come and look at the property in question and carry out a market valuation, on which the amount of stamp duty payable will then be determined. It is also possible to carry out independent property valuations yourself. Objective and supportable data must be used to work out the market value of the property, and this is likely to be closely checked by an official. One way to accurately determine property value is to look at the sale price of similar properties in the area or on the same street that have been sold recently.
A market valuation is a legal requirement when transferring or selling property, especially when it is between family members, as these transactions are generally considered unique in that they are not carried out ‘at arm’s lengths’, i.e. with each party being totally independent and not influencing one another in any way, as per the rules set out by the Australian Taxation Office.
6. Can A Property Be Sold At A Discount To A Family Member?
The valuer that comes to determine the amount of stamp duty required will come up with a market value price for the property. The owner of the property is perfectly entitled to sell their property for whatever price they want, which means they are legally able to drastically reduce the price for family members, which is officially named a ‘favourable purchase’. However, whatever price is eventually agreed upon, the amount of capital gains tax, i.e. stamp duty, is fixed on the market value price, so even if you aren’t technically making a profit on it, the same tax price must be paid.