Parental guidance recommended

Question: My girlfriend’s parents want to buy an investment property, which we will live in and rent from them for the time being. In the future, we would take over the mortgage from them and pay off the remainder of the loan. I was wondering, are we able to take over the mortgage from them easily, or are there tax implications to think about? Would we be better off putting our names on the mortgage along with their names when they purchase the property? What’s the difference? If we took over the mortgage, would that mean they are selling us the property and therefore subject to CGT and stamp duty, etc?

Answer: Under Australian tax law liability, to pay CGT depends on who owns the investment property. It could also affect your capacity to claim a tax deduction (especially if you negative gear while paying off the mortgage). If you plan to live in and rent the investment property from your girlfriend’s parents; make sure you pay them a commercial rate of rent. Otherwise, there’s a risk the Tax Office could reduce or disallow any rental expenses they incur (such as interest payable on the loan repayments).

If your girlfriend’s parents were to buy the investment property in their names; they will become personally liable to pay CGT on any capital gain they make at time of sale, and more particularly when ownership transfers to you and your girlfriend. This will also be the case if they were to gift the investment property to you. When you say you will take over the mortgage it implies that you now own the property. If this is the case your girlfriend’s parents are liable to pay CGT (if applicable) at the time ownership transfers to you and your girlfriend, and you will become liable to pay stamp duty.

On the other hand, if the investment property is purchased in joint names (for instance on a 50/50 basis), your girlfriend’s parents will still be liable to pay CGT at time of transfer of their share in the property to you and your girlfriend, and you will still be liable to pay stamp duty when their share transfers to you. In the meantime, complications will arise with respect to your capacity to claim tax deductions, as you will now be residing in a property that is partly owned by you and your girlfriend.

  • Answer provided by Jimmy B Prince, FCPA

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Comments
  • aryastark says on 15/02/2013 11:18:07 AM

    Thanks for this article. My boyfriend and I spent a long time talking about how to handle a mortgage in Hamilton, and whether or not we would be willing to rent from parents. This is a great article to think about, thanks!

  • Eos Property says on 16/02/2013 11:12:51 AM

    I assume you are both looking to your parents for assistance to get into the property market and this is the strategy you are leaning towards. Is this correct?

    If so, have you spoken to a broker about the possibility of parents setting up a line of credit secured by their own home and then using this money as your deposit? They may also be required to provide some sort of guarantee.

    Now the strategy is not without risks and you should seek good legal & financial advice before launching into something like this but it may be an option you hadn't considered.