Gifting rental property with lifetime interest in rental income

Question

I am considering gifting my rental property to my child. My lawyer will draw up the paperwork, obtain valuations, etc.

I wish to retain the rental income for living expenses and will pay the rates, insurance, etc. The property is 100% owned.

Do I continue to show the income as rental income and claim deductions after the transfer has been completed?

Answer

If you are fully transferring ownership to your child then the rental income and expenses should be declared in their tax return, their name is on the title deed.
The only way you will be able to direct the income into your tax return will be to create a life interest for yourself in the rent from the property. This creates all sorts of problems if you or your child decide to sell the property. Further, the life tenancy will interfere with your child’s ability to borrow against the property. This is an area for your solicitor but please make sure they are aware of the CGT problems associated with life tenancies. The relevant ATO ruling is TR 2006/14.
I would like to point out that if you did not buy this property before 19th September, 1985 then you are going to be liable for CGT on this transfer. You will be deemed to have sold it to your child for the market value at the time. The market value will also be the first element of your child’s cost base. Alternatively, if you leave the property to your child in your will no CGT will be paid on the transfer. CGT would only be payable if your child sells the property though the cost base for the CGT calculation will start with your cost base if it is inherited. Accordingly, no CGT is avoided but there is considerable benefit in the fact it will be delayed.
If you purchased the property before 19th September, 1985 then I beg you not to transfer it to your child. In your hands it is exempt from CGT. The CGT clock will start to tick once it is in your child’s name. On the other hand if your child inherits your pre CGT property, yes it does become subject to CGT but your child’s cost base should be much higher as it will be the market value at the date you die rather than the market value when you transfer the property. Leaving a pre 19th September 1985 property in your name will permanently protect from tax all of the capital gain between now and your death.
I can’t comment because I don’t know your reasons for transferring the property but I can say that there are a lot of tax reasons to do this through your estate instead. It should also save you stamp duty. Not that I know which state you are in but generally when a property is transferred on death there is no stamp duty yet a transfer to a child while you are alive will probably attract stamp duty. Your solicitor would be the best person to advise you on the stamp duty laws in your state.
If you are on a Centrelink pension or likely to be on one in the next five years you also need advice now on how they will penalise you under their gifting provisions.

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