Can I buy my parents property for a discount?

[undercover]

My parents have a property which is worth about 480-520K, If I was to purchase and turn this property into a IP in the future is there any Tax laws or issues I would need to consider?

Example if they sold me the property through private sale for 400-450K?

 

[MarkB]

Ethics....

Do they know what sort of discount they're offering to you?

Are they aware of both it's true market value (in your estimation) and what you propose to pay them for it?

 

[WASP]

My parents have a property which is worth about 480-520K, If I was to purchase and turn this property into a IP in the future is there any Tax laws or issues I would need to consider?

Example if they sold me the property through private sale for 400-450K?

Do they know what sort of discount they're offering to you?

Are they aware of both it's true market value (in your estimation) and what you propose to pay them for it?

about a 70-80K discount

 

[Twitch]

What are you trying to achieve with this discount

Relieve your parents of some money? Lower stamp duty and slide the difference under the table? Something else?

 

[MarkB]

I don't have an issue with the discount, or even the size of the discount as long as all parties to the transaction are fully aware of what is going on and know that the property is being transacted at a discount.

Parents help their kids out all the time financially, so there is nothing new, illegal or immoral there.

However, what I personally would have an issue with is if the parents had no idea of what was happening. As real estate investors we pride ourselves on buying for the least possible price, but for me duping friends and family crosses a major moral line.

 

[undercover]

My parents offered to sell me their property and are happy with a price which will pay out their current loan on the property. (around 350K)

They approached me because they no longer wish to live in this area and don't want to sell the property because they know it is a fantasic property.

They want to sell it to me to retain in the family and do not wish to have a loan with a bank. They will move into one of my IP's and are happy to pay market rent. They prefer to rent and I'm prepared for them to live in one of my IP's

This is not about ripping my parents off or free loading to my advantage, they simply do not want the burden of paying a large loan on their moderate income.

They would sell in to me for 350K but I was unsure if this is illegal or would create an issue with the ATO?

 

[undercover]

What are you trying to achieve with this discount

Relieve your parents of some money? Lower stamp duty and slide the difference under the table? Something else?

The cheaper I can purchase it legally the less funding I require. This property would be CF+ as it would rent for $450+p/w. I'm only in the 31.5% tax bracket so tax right off is not my aim. If anything the main aim to is pay off my parents current loan on the property (350K)

 

[Twitch]

The ATO don't care about that sort of deal.

I have to wonder though how "keeping it in the family" is worth $100k to your parents. Have they got millions stashed somewhere so they don't care about the odd $100k or so?

 

[undercover]

The ATO don't care about that sort of deal.

I have to wonder though how "keeping it in the family" is worth $100k to your parents. Have they got millions stashed somewhere so they don't care about the odd $100k or so?

No, they hate money, I'm surprised they brought the place, but it was an off the plan purchase and only made after they had a coffee on Bridge Rd one sunday afternoon.

 

[wylie]

Do you have any siblings, and what would they think about you getting the place for such a bargain? If you are an only child and your parents are "kind of" handing over some inheritance that you would get anyway down the track, I can understand it, but I would not charge them market rent because that does sound like you are taking advantage of them after they have been more than generous to you, especially as you say they are on a moderate income.

If you do have siblings, I cannot see how it will NOT end badly. I have seen this type of thing in hubby's family and it split the siblings. I would tread very carefully.

 

[MIZBUF]

My understanding(based on a recent experience-so not advice here) in N.S.W-- If a property is sold to closely related persons the Office of State Revenue will look at the sale price and compare it to similar sales in the area- My solicitor advised we obtain a valuation to asertain the value and thus arrive at the correct S.D to pay on the transfer. I doubt you would be able to pay S.D at the reduced rate reflecting the much lower than market value you intend to pay for the property. Of course your parents can sell the house to you at any low price but O.S.R will calculate S.D on its value not the sale price.

 

[Kristine..]

My parents have a property which is worth about 480-520K, If I was to purchase and turn this property into a IP in the future is there any Tax laws or issues I would need to consider?

Example if they sold me the property through private sale for 400-450K?

Hello undercover

Yes, this is a straight forward transaction. You can pay whatever is agreed between the parties, but you must render unto Caesar the things which are Caesar’s and pay Stamp Duty and other Government fees on the Estimated Market Value of the property.

From a lender’s point of view this is an Advantageous or Favourable purchase.

Of the lenders which will lend on such a deal, you will generally be restricted to their usual lending criteria and not more than the Consideration (Purchase Price) plus ‘reasonable costs’.

‘Reasonable Costs’ means you would usually be able to borrow to about 105% of the Consideration.

In Victoria, you will not need a S.32 for such a transaction, not even a Contract of Sale, just the proposed Registered Proprietor Transfer of Land showing the Consideration

So if the property is worth, say, $500,000 and you have a Real Estate Agent’s letter estimating the market value at $500,000 then you will be required to pay Stamp Duty on $500,000.

(The lender will value the property in the usual way but the State Revenue Office requires an Estate Agent's letter of estimated market value, not a Valuer's valuation.)

A loan scenario could look like this:

Consideration of the Property $400,000
Plus Stamp Duty on $500,000 = $21,970
(Victorian Non-First Home Buyer’s Rate)
Land Transfer Registration on $500,000 = $1,346
Registration of Mortgage = $95
Conveyancing Fees inc Search Fees = $750
Adjustment of Rates eg = $750
Lender’s Establishment Fees (inc docs, val, settlement) = $750
Lender’s Mortgage Insurance on $425,661 = 85%LVR = (approx) $4,600

Funds to Complete: $430,261

Loan to Consideration $400,000
Plus Capitalisation LMI $4,600
Plus Reasonable Costs $25,661

Maximum Loan to 105% Consideration $$425,000

Your Contribution $5,061

Note: Some lenders will lend to their usual maximum LVR of the Market Value of the Property but there will be restrictions (depending on lending policy) of when you may access equity, eg some have a ‘no access to equity’ restriction of six months, but others apply twelve months from date of settlement.

In all other regards, the loan can be any of the usual products including Professional packages.


EDIT:
Sorry, didn't read that the balance of your Parent's liability is about $350,000

Here is the scenario for paying out the balance of their loan (rounded to $360,000 to allow for discharge fees and charges)

Consideration of the Property $360,000
Plus Stamp Duty on $500,000 = $21,970
(Victorian Non-First Home Buyer’s Rate)
Land Transfer Registration on $500,000 = $1,346
Registration of Mortgage = $95
Conveyancing Fees inc Search Fees = $750
Adjustment of Rates eg = $750
Lender’s Establishment Fees (inc docs, val, settlement) = $750
Lender’s Mortgage Insurance on $385,661 = 77%LVR = (approx) No LMI

Funds to Complete: $385,661

Loan to Consideration $360,000
Plus Capitalisation LMI $N/A
Plus Reasonable Costs $25,661

Maximum Loan to 105% Consideration $425,000

Loan Required $385,661

Your Contribution $Nil




Hope this helps
Kristine

 

[MarkB]

My parents offered to sell me their property and are happy with a price which will pay out their current loan on the property. (around 350K)

Yes, but do they know what the property is really worth?

Have you told them that you think it is worth ~$500k?

They've named their bottom line - doesn't mean you have to gravitate towards it if you know the top line is alot higher.



Imagine a situation where a real estate agent has an older couple as vendors who in a house that the REA estimates is worth ~$500k. The vendors don't know what their house is worth, but have revealed to the REA (who, for better or worse they trust), that what they want from the sale is to have their $350k mortgage cleared. The seemingly kind and caring REA says, "hey, I'll buy the place off you for $425k". The vendors accept this offer. The sale goes through, the vendor is happy (no mortgage / some cash in the bank), the REA is ecstatic (he just got a place well below fair value).

Fast forward to 6 months or so later and the vendors find out that their place really should have sold for ~$500k and that the REA, who did not disclose this, actually duped them.

Needless to say the couple are distressed to learn that their confidence was breached and horrified to realise that they are out of pocket tens of thousands of dollars. They consult their lawyer and quicker than you can say "all real estate agents are scum" the matter is in court and the REA is being dragged in front of the applicable licensing authority. The REA cops a fine, probably loses his ticket and is ordered to pay compensation.

Are you that real estate agent?

 

[Sheryn]

If you do have siblings - it will cause problems $$ always does in families even when you all have plenty.

If you are the only child and your goal /motivation is to help and support your parents pay for an independent valuation by valuer and get 2 or 3 REA agents to give you a free appraisal, then discuss with parents and write figures down and get parents to sign = informed decision making.


Regards
Sheryn

 

[Belu]

how about discounting your parents rent in return? that way it is tax effective for you (neg gearing at 31.5% is still alright). you will still be better off for it and so will they - less cash drain on them.

 

[undercover]

Thank you everyone for your detailed and genuine advice.

Yes I'm an only child and no other close family to have any issue with.

At first I advised my parents to rent out their property out as it would ask $450p/w and would almost cover their current loan repayments. They did not like this idea and like most people (apart from the great people of SS) don't have the mindset to do this.

My parents know the property is worth 500K+, we have openly discussed this, I even arranged for a REA to come and give a sales pitch to them. They brought the property off the plan and enjoyed 18 months of CG and when settlement came in May 2008 they also had a bank valuation and also have been contacted by a number of REA, they honestly would prefer to sell the property to me instead on selling and making an extra 100-150K to a stranger. To them making 100K is less important then giving me the opportunity to expand my IP's.

They are happy to pay 250p/w rent for my IP, which I could rent on the open market for 280p/w but like you say, it works out for me as I have no agent fees, tenent issues and dad loves doing renovations to keep busy. I also plan to allow them to live in this IP when they retire for free as the loan on it by then will have been paid off. So if anything I'm helping them out just as much. I can't wait till the day maybe in 10-15 years when I have enough money to buy my parents anything they wish, I would love to send them on a world trip and provide for them in retirement as I know the Government will not.

I had tea there tonight, they don't like the property that much they say its to modern for them and too many young people about. I told them I don't how or why you brought this place but your sure did pick a winner, shows sometimes it's just luck!

 

[Bill.L]

Hi all,

Kristine, are you sure about the state revenue office requiring an estimation from a REA instead of an official valuation??

It seems a bit strange to me.

The reason I ask is because we settled a partnership (between family) property last year. All we used was an official valuation. It included prices of similar sized properties. The state revenue office had no issue with the valuation.

bye

 

[Kristine..]

Hi Bill

Yes, Truth is often Stranger Than Fiction.

A customer of mine bought property from his son-in-law in March, 2008. The agreed Consideration was for about half the current market value of the property.

The customer used one of the most experienced conveyancers in Victoria and she double checked with SRO - no 'Valuation' was required, Stamp Duty would be calculated on the lower Estimated Market Value so if the Estate Agent has said, for example, that the property would fetch $260,000 - $280,000, the Stamp Duty and Transfer Registration Fee would be calculated on the $260,000.

This is what happened.

The lender, as previously stated, required a Valuation for lending purposes but the SRO did not require a copy of this Valuation, just the letter from a Licensed Estate Agent.


Bill, perhaps your 'settlement' was a division of assets. My cutomer purchased the property, his name was not on the property title prior to settlement and was a complete, stand alone transaction. The only documentation required by the lender was the proposed RP Transfer of Land and the Valuation, and by the SRO, the Transfer of Land and the Estate Agent's letter.

Cheers
Kristine

 

[wylie]

I am fairly sure that the stamp duty and other costs incurred during transfer of houses from my parents' names into a family trust were done on a real estate agents valuation.

 

[Bill.L]

Hi Kristine,

Ahh yes, it was just a rearrangement of existing owners, it was also rural, zoned farming. Possibly made a big difference.

However there was another property we bought 5 years ago, at full arms length, with the SRO accepting the valuers valuation. No REA involved in that one either. Bank actually accepted the same valuation as it was one from their panel of valuers.

Bit of a story in that one as we bought it off a relative of a friend who was in a bad way at the time. A couple of years later her ex got back with her and they convinced the police that there was something shady that needed looking into. One look at the valuation, which is what we paid, finished the investigation immediately.

Having the professional valuation done takes the stress out of the situation when dealing with friends/family.

bye