We are now at a time where many of the parents of baby boomers are passing on, leaving legacies to their families. This raises many issues about capital gains tax and the best strategies beneficiaries can use to optimise their affairs.
An email from a reader I received recently is a great example.
The reader’s father, a widower, passed away last year, leaving his unit to him and his sister, the only two beneficiaries in dad’s will. His sister has agreed to sell her half of the unit to him and he and his wife were contemplating getting a loan to buy her out then rent out the unit to cover the loan interest.
He asked if there were any tax implications transferring the unit from dad’s name to his? He also mentioned that he and his wife worked full-time and were keen to negatively gear the property.
Let’s examine the tax issues first. If the property was his father’s residence which appears to be the case it will pass to the beneficiaries tax-free at market value at date of death. Provided the transfer takes place within two years of the father’s death there will be no capital gains tax consequences.
But I think the bigger issue here is whether he should buy that property at all. If he did buy his sister’s share, which must be done at market value, he will have 50% deposit, so the property will almost inevitably be positively geared, which takes any thoughts of negative gearing out of the picture.
Also, by acquiring this property, he is ignoring every other property which is on the market in the area. Unless there was enormous potential in this property, I believe a better course of action would be for the two siblings to cash in the property tax-free, and split the proceeds 50-50. He would then have a substantial lump sum available which would give him a much greater range of choices. For example, if appropriate, he and his wife could contribute the proceeds to super as a non-concessional contribution – alternatively, they could buy any property they chose with minimum deposit, using a mortgage over their own residence as security, and take advantage of maximising their negative gearing. In my view, acquiring this property is the worst course of action he could take.