looking for creative ways to help subsidise children's first homes

C

Carol

Hi everyone,

I am new to this forum and am interested in some clever ideas on how to help subsidise my children's first homes.

I am interested in hearing what other people might have done.

One idea I have had is to buy a basic house on a block that can be sub-divided. I could then build on the hived-off block, sell it off for a good profit, and then sell the existing house to my child for the difference in cost.

here are some hypothetical figures:


1. the basic house on development block costs $800,000

2. the new house on the subdivided block gets sold for $700,000;
3. the costs of the exercise - stamp duty, sub-division costs, building costs, selling costs - add up to $200,000
4. the existing house gets sold to my child for $300,000

The net capital gain is zero. My child buys the existing house for cheaper than its market value. My child then gets to claim discounted stamp duty and the first-home bonus.

My child could perhaps sub-let the two bedrooms to friends to help pay the interest .

Is all of this legal?

1. Can you sell a house to a child for below-market value?

2. If yes, can they still qualify for the first-home bonus?

3. Can you actually make a capital loss on the deal and claim that against your tax? (I don't think you could do that!)

4. Can your child sub-let rooms in their house and still qualify for the first-home bonus and get to call the house their principal place of residence?

Are there other ways you've helped your child get a good first-home at a discount without simply handing them over heaps of cash?

Thanks, Carol
 
Hi Carol.
I know a couple of answers to some of your questions.

If your child sublets a couple of rooms then they will pay a % of capital gains tax when its time to sell.It may not be worth doing this.Yes they can still claim it as a PPOR.

If you sell the house under market value[well under] then it will be hard for the banks to give a good val if the child wants to refinance etc.This is what l was told by a broker when l bought an ip and l was offered a years rent in advance but to take it off the sale price.If you work it out it does not make much difference to stamp duty, unless your talking big discounts.Broker said it wasnt worth the possibility of lost equity down the line.

If child lives in the home for a period of time in the first 12 months then they can claim the FHOG.

Hope its of some help
cheers yadreamin
 
Good question as it is on our minds to.
We considered doing a duplex development, sell one keep the other for them. Do it in all 4 names to avoid financing issues and also reduce taxation issues. Considered a family trust but concerned about CGT when they sell. But then again I would encourage them to not sell.

Trouble is no FHOG, ties us up with servicing issues. At the end of the day we decided that a Family trust would be the best approach. Havent exercised the decision yet as they aren't ready.

Another option is get the kids to buy an IP. Stay at home/rent and use the equity/rent from the IP to build up so tha eventually they move in or use it as a base towards there PPOR.

Its not easy but there has to be a way. Will follow this thread with interest.
 
Hi Rambada

The trouble is you don't want your mature kids to stay at home because it's not good for their development. I moved out of home when I was 21 and loved it.

It's very interesting. We live in a good suburb a couple of minutes walk to the river. Our eldest daughter said she could never imagine having to live away from the water!!! Once you're used to living somewhere nice, how do you adjust to living somewhere affordable but awful?!!!

She is planning to live in shared accommodation for a while, so it seems to make sense that she is the landlord as well as one of the residents - if there is a way to arrange it.

The trouble is she is about to start a PhD, which will earn her just $25000 tax-free. That's not very much to service a $400,000 - $500,000 house mortgage!

I've misplaced my Rich Kid Poor Kid book, but I vaguely remember the author said he paid for his first house by buying a large block of land with house and selling off the lands as bits, thereby earning enough profit to get the house and a bit of land for free. Maybe my memory is distorting that a bit, but that is one way to solve a problem like this.

We could say to her "we will finance a clever development idea if you can find one and you get and have to pay for whatever is left over after the sale of the excess stuff".

It probably can't be done - but it's still an interesting exercise in theory. I should discuss it with my accountant.

It's odd to find yourself in a position where you have more money than you need, and you'd like to give your kids a kick start, but you also don't want them to get it too easy and take the fun of striving and struggling away from them.

I know that we bought our first place much too late; I also remember thinking how hard it was and how I envious I was when I heard of any help our friends got from their parents.

Carol
 
Like the idea of them finding the deal - it gives them onweship. But you are right. It is intimidating for younger people starting out and they certainly need to have the motivation & drive to get them there. Mine aren't driven enough yet. When they pester me and show they are tenatious enough to tackle it then we will be more proactive. But the time will come - it did for us and now that seems easy.
At the moment we are guiding them to place money in high yield managed funds, reinvesting the returns. The idea is that this will help servicability issues. We believe that capital issues can be circumvented by value adding/developing.
 
Carol, may I suggest also reading The Millionaire Next Door, in particular the section about Economic Outpatient Treatment.

Helping kids with money doesn't necessarily help them in the long run. You may have been jealous of your friends who received parental help, but now who is better at managing money? I know far too many of my peers who still depend on financial help from parents.
Alex
 
Alexlee

I know what you mean. I have actually read that book - but a long time ago. I'll have another look through it.

I also read an article in the BRW a couple of months ago which more or less said that a large propertion of children of wealthy,self-made dads turned out to be duds!

Thw writer said they had to promise the successful dads anonymity before the dads would speak honestly about their kids!

It's a curly one and something I have agonised over.

Fortunately our kids are very hard-working in their studies and are ambitious in their goals.

I have told them all I'm keen to help with funding if they ever want to create their own businesses, or in our elder daughter's case, help with funding of her research. That way I get to be a venture capitalist, and if they blow the opportunity, well so do at least 50% of other new venture capital businesses!


This business of how to distribute money to your adult children when you have excess funds is a challenging problem, and not a problem you can usually discuss with your less financially well-off friends.

The other problem that crops up regarding money and kids is that it's important to give equally to each one - -even though can can be hard to get right own to the last dollar.

Maybe nothing will come of this house idea - I just thought it was interesting that here you have a situation where you choose to deliberately sell a house well below market value in order to minimise your own capital gain, which you don't want, and to give your child a cheap entry into the market.

It's going to be hard for my elder daughter - she's 22, her PhD will take probably 3-4 years and then if she's lucky she will get an academic job , which pays a modest salary. We know all about that as my husband is a professor at last and has finally hit a 6-figure income! He couldn't get a proper academic job until he was 32. Until then he was on short-term research grants.

I figure my scientist daughter will deserve a bit of a helping hand!

Carol
 
Carol I'm all for helping ones children get started. We do just that by joint venture investing with ours.
There is an issue to consider if you sell them a house. You may be subject to paying CGT for the true value of the property that you sell to your child. A friend and her husband sold their IP (being rented by the adult child) to the adult child for 250K. Clearly it was below market value. Any more and he wouldn't have been able to afford it. As the buyer was also eligible for FHOG, he did receive that. But, his parents have just had to pay an increase in the CGT due between the 250K they sold it to him for and the 320K the valuer stated it was worth. They ended up simply paying up because they knew the property may have fetched 360K if it had been on the open market.
 
is that for real tizzy? i thought the person buying at well under market value just had to pay the stamp duty as assessed at fair market value....(which is well below the CG tax liability of seller if there's been a nice growth..can be paid by seller/parents).
thought there wasnt any CG liability on seller if sold well below market value, or lets say at their purchase price...how can you owe capital gains if there isnt any?
 
What they save (cash wise) towards a ppor/ip you will match. Giving you a good idea on how badly they want to get into the property game..

Geoff
 
Hi Ricardo. Yes it is so apparently. Settlement agents are the place where same surname "exchanges" get identified. How I understand it is that the Settlement Agent notifies the Valuer General when the same surnames crop up. A valuation is done and the buyer must pay increased Stamps when the true value is determined. Then the parent seller has to pay the additional CGT as though they received the full value in the sale. In this instance, as the VG valued the house at 320K, the accountant was able to calculate the additional tax liability for my friends at almost 10K more than they were expecting.

As for the additional stamp duty to be paid by the buyer (getting FHOG), he had to pay an extra 9000K in stamp duty, ie the stamps due on value between 250K & 320K.

Checking with your own accountant first may be best. Perhaps there is some way to avoid this happening? In my friends case, she doesn't believe it would have been picked up by the settlement agent if the two surnames had been different.
 
From a tax perspective, selling a property involves paying CGT, which is likely to be >5%. If the govt finds out you're transferring property at a lower than market price (deliberately, as opposed to just finding a desperate seller), would they just charge you stamp and let you go on CGT?
Alex
 
It may be worth a new question in the accounting and tax forum Ricardo. Especially if this is some law that can be open to interpretation. Be good to get some tax accountant comments.
 
pretty decent answer from my beancounter today...


Scenario:

Mr A has an investment property, purchased for $100,000.
Sells to Mr B for $100,000 (say 7 yrs after he bought it) - even though it is really worth $500,000 in real market value.

Would he be liable for GGT?
Obviously there is no capital gain, so the answer may well be NO. But…its not true value of property, and if one was to investigate, could he be seen to be doing to avoid CGT perhaps??

Stamp duty (state revenue) do get you, you pay the difference at what would be normal market value.

But what about cgt?
------------------------------------

Reply:
Ruling or definitive answer is available however it is not the answer im sure you are looking for......

Tax law specifically disallows the below mentioned situation of transferring a $500K asset for $100K via the Market value substitution rule. In essence, this applies if you do not deal at arms length with the other entity in relation to the asset acquisition/sale. If this is deemed the case, the cost of acquistion may be taken to be the market value of the CGT asset as at date of acquisition/sale.

In the situation below, the parties aren't dealing at arms length as a $500K property is being transferred for $100K. This is further highlighted when the property is stamped and gets an established market value of $500K. Thus, if the ATO reviews the situation, the sale price of $500K will be booked and a capital gain of $400K will be assessed.

Proceeding as you have suggested below and realising no capital gain on the sale from A to B would be a high risk of tax audit. You will be better advised establishing some sort of realistic market value supported by some favourable real estate valuations (ie at 350K due to the significantly run down nature of the residence, etc).

If the plan is to then on sell from Mr B who has signifcantly reduced tax rates or access to main residence exemptions, then you will be well advised to let a reasonable period of time elapse prior to on selling at a profit (minimum of 12, preferrably 18months).
 
Thanks for all the great posts, everyone.

Looks like my clever idea of having my children "beat me down savagely from fair market price" isn't allowed!

I had a long conversation about this topic with my children and one of the boyfriends.

It was interesting. My youngest said "why would you want to give us money once we're adults?"

The boyfriend said it would be fun to start at Balga ( a historically rough suburb in Perth) and work your way up. My elder daughter said she didn't mind where she ended up buying.

I said 'wouldn't you find it hard downgrading and having to subsist on jam sandwiches every night while we were feasting on fine food?"

They said they would come home for meals often!

The boyfriend doesn't see why he should move out of home until he has saved up a home deposit. He sees rent as dead money and life at at home is easy and cheap. I suspect my daughter will choose to live at home for a while longer too.

I think it's odd that they are not champing at the bit to leave, but I suppose I left home to win some freedom and independence; they both have most of the freedoms and independence they want without the burdens of having to do chores and pay money!

Alexlee, I read those vital chapters in the millionnaire next door book - pretty sobering stuff.

Looks like no money for any of them until they are at least 35!

That's not a bad idea, as I found the time we really felt stretched for cash was when our children hit high school years - - we had private school fees, plus a new house to pay off plus expensive hobbies to support, and then the cars and the uni fees....

I'm sure my husband and I wouldn't have been corrupted by the occassional handout then. In fact, my husband's parents out of the blue offerred us a $10,000 interest-free loan when we were finishing off our house and just said to pay them back when we could afford it. We paid them back pretty quickly as I felt a little bit uncomfortable owing them money, but it was a really nice, touching gesture.

One idea I have always liked is the idea of the grandparents ( us, one day) of funding a regular family holiday somewhere nice, say every couple of years. This would be especially good if the family members have moved interstate.

This would be a win-win for everyone, as it would be nice for my husband and I to have the family to get together every now and then for a holiday and the family would want to get together if they got to go somewhere nice (the incentive!) . that would be money well spent and a good investment in happy families.

Carol
 
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Carol, I assume your eldest daughter has checked out thoroughly the Perth job opportunities and remuneration for post docs in her field of study, in addition to whether her field is an ARC or NH&MRC priority research area. If it isn't, then that determination of hers will be put to the test, overseas.....and AFAIK, she is unlikely to gain tenure in an Australian university as easily as your husband did.
 
Nope! But she plans to do her PhD on Altzeimer's so hopefully that topic is regarded as a good one for post-doctoral funding.

Hope she discovers something big quickly. No time to waste as my mental faculties are deteriorating quickly.

Carol
 
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