Facts
Clients, being at risk professionals, have purchased their home (main residence) in their personal names to obtain the generous advantages of the CGT main residence exemption.
Question 1
Can they protect the equity in the property?
Answer
Yes.
There are two (2) options:
A. transfer the home to a low risk trust; or
B. implement a gift & loan back or similar strategy.
Question 2
Which is the better strategy?
Answer
Option B, as the advantages of $nil stamp duty and continuation of CGT main residence exemption are superior to the advantages under option A.
Tax Tip
Option A:
advantage:
nil maintenance – once the property is transferred, the low-risk trust (as its name suggests) protects the property
disadvantages:
stamp duty applies
the property may not be able to access the CGT main residence exemption when the trust sells the property (see Tax Tip #5)
legal costs, but lower than option B
the 4.5 to 5.5 year bankruptcy claw-back continues to apply as the transfer to the low-risk trust will likely be an undervalued transaction
for existing mortgage(s) on the property – refinance costs
Option B:
advantages:
$nil stamp duty – significant advantage
CGT main residence exemption continues to apply
disadvantages:
some maintenance – the gift amount must be topped up when the equity grows (preferably annually)
legal costs higher than Option A
the 4.5 to 5.5 year bankruptcy claw-back will apply as the gift to the low-risk trust will be an undervalued transaction
for existing mortgage(s) on the property – possibly deed of priority requirements of first mortgagee - generally low cost
If you would like to receive up to date tax tips directly to your email, subscribe below.
Comments