Everything You Need to Know About Transfer of Property Between Family and Friends
Transferring property or vacant land to someone without selling may seem like a complicated process, but it’s a common practice that can benefit both parties involved.
Whether you’re gifting a property to a family member, transferring it to a business partner, or changing ownership due to divorce proceedings, there are significant legal, financial and tax considerations that you need to consider to ensure a smooth transfer of ownership.
In this blog, we’ll explore the ins and outs of transferring property without selling it, including the legal requirements, tax implications, and potential benefits of doing so.
What is a Property Transfer?
Transferring land or property refers to changing ownership from one person or entity to another, which you can do in various ways, such as selling property, offering it as a gift, leaving it as part of an inheritance, or transferring it to a trust.
A property transfer typically involves legal documentation, such as a deed or a title, to show the change in ownership. The transfer may also include paying certain taxes or fees, depending on the transfer’s circumstances and the property’s location.
You must follow the proper legal procedures when transferring property to ensure the entire process is valid and legally binding.
Transfer Property Amongst Family and Friends
While the most common method of transferring property is through a purchase and sale agreement, you can also transfer property without selling it. A few examples of when you might transfer property among family and friends without selling it include:
- As a Gift: A property owner may want to gift property to a family member or friend.
- In a Divorce Settlement: It is not uncommon for one spouse to transfer property ownership to another during divorce proceedings. This can be done as part of a property division agreement, where each spouse receives an equitable share of assets acquired during the marriage.
- To Include Spouses or De Facto Partners on the Title: In the event of a marriage or a de facto relationship, an individual who owns a property may consider transferring partial ownership of the property to their partner or spouse.
- For Estate Planning Purposes: Property owners may wish to transfer their property to their heirs or beneficiaries as part of their estate planning. You can do this through a will, trust, or other legal mechanisms.
- As Financial Support: Parents may wish to transfer their property to their children to provide financial support. This could be done to help the children own a home or to give them a source of rental income.
How Do You Transfer a Property Title?
A property title is a legal document that establishes ownership of a piece of real estate, such as a home, land, or commercial building. The title provides evidence of ownership and contains information about the property, including its location, size, boundaries, and any restrictions or encumbrances on its use.
In most cases, either the property owner or financial institution that has provided a mortgage loan to the owner holds the title. However, you can transfer the title to a buyer, family member or friend for the reasons mentioned above.
The process of transferring a property title between family members and friends is similar to any other property transfer, involving the removal of one person’s name and the addition of another. However, there may be differences in how your State’s Revenue Office assesses stamp duty when transferring to a family member or friend.
There could also be capital gains tax implications.
And the process becomes a bit more complicated when there is an existing mortgage on the property. If you are also transferring the mortgage, the person receiving the property must undergo a loan approval process.
We recommend checking with the lending institution before proceeding with a title transfer and seeking professional advice regarding potential tax and financial implications.
What are the Capital Gains Tax Implications?
Generally, if you acquire any property after 20 September 1985, capital gains tax (CGT) legislation will apply to any transfer of ownership. However, how it applies depends on the nature of the transaction.
For example, if the original owner treated their property as their main residence before gifting it to someone else, the transfer will typically be exempt from CGT. But if the property was an investment before gifting it, there will likely be CGT implications based on the property’s market value.
Certain CGT rules also apply when you inherit property, which you can read about in this guide.
Marriage or Relationship Breakdown
A marriage or relationship breakdown rollover may apply in the event of a marriage breakdown and property transfer award. The rollover entails disregarding any capital gain or loss when there is a property transfer between spouses.
Leila and Phillip purchased their main residence in 2011 for $520,000 and jointly owned it.
Unfortunately, their marriage broke down, and Leila transferred her legal interest in the property to Phillip on 1 April 2022 as per a binding divorce agreement.
In this scenario, the ATO grants Leila the relationship breakdown rollover, and she doesn’t have to report any capital gain or loss on her 2021-22 individual tax return.
Philip continues to live in the property as his main residence. So, if he decides to sell it in the future, he can claim the main residence exemption and won’t have to report any capital gain or loss. However, if he decides to turn his main residence into an investment, there will likely be CGT implications for the time he generated income from the property.
You might be interested in reading our guide on What Happens When Your Rental Property Becomes Your Main Residence.
Other CGT Scenarios
We’ve broken down a few case studies that you may find useful in establishing the capital gains tax implications of your property transfer. However, as each individual scenario is dependent on the facts, you must consult a tax advisor to calculate the capital gains payable and help with tax return preparation.
You might be interested in reading about the Main Residence Exemption for Deceased Estates.
What are the Transfer Duty (Stamp Duty) Implications?
Transfer duty or stamp duty is a tax that your state government charges when there is a title transfer. In a normal buy and sell transaction, you pay transfer duty as part of the acquiring costs. The same applies to any other transfer, including amongst family, friends and spouses, although some exemptions may apply depending on your state laws.
For example, in New South Wales, if you add your spouse to the title of your main residence, you may not have to pay stamp duty. And if you transfer your share of the title to your partner or spouse due to a relationship breakdown agreement, you could be exempt, too.
If you’re not exempt from paying stamp duty, you’ll need to get a Certified Practising Valuer to conduct a stamp duty valuation to determine the current market value of the property so that you can calculate your stamp duty obligations.
Once again, your obligations depend on the nature of your specific scenario. So, obtaining relevant advice from a tax expert or lawyer is necessary.
Transferring a property title without selling the property can be a complex process that involves various legal, financial, and emotional considerations. Whether adding a spouse or partner to the title, transferring the property as a gift, or supporting children, you should seek professional advice and understand the transfer’s potential tax and financial implications.
Moreover, stamp duty is a significant cost to consider when buying a property, and it is essential to review stamp duty laws and regulations in your jurisdiction to ensure compliance.
Overall, transferring a property title can be a beneficial and practical solution in many cases, but it requires careful planning and expert guidance to ensure a successful and stress-free transfer.
If you are considering transferring a property title or purchasing a property and need guidance on your tax implications, Property Tax Specialists has a team of experienced and knowledgeable professionals who can provide tailored advice and solutions to meet your specific needs.
Contact us today to schedule a consultation and take the first step towards a successful property transfer or purchase.