Buying a property for your child to live in is one of the most generous steps a parent can take. It gives them stability, saves them from the stress of renting, and provides a foothold in Sydney’s notoriously tough property market. Yet behind the goodwill lies a hidden reality: the tax implications. Here we share how smart planning can help you reduce your capital gains tax (CGT) bill if you’re planning this approach for your children.
When generosity creates a tax bill
Because the property isn’t your main residence, and because no rent is being collected, it falls outside the principal residence exemption. At the same time, you can’t claim deductions on expenses like interest, rates or insurance while your child is living there. Fast forward a decade or more, and the CGT bill on sale can come as an unpleasant shock.
However, not all is lost. With careful planning and record-keeping, parents can turn what feels like a disadvantage into a genuine financial saving. One Sydney family recently proved just that, cutting their eventual CGT bill by almost $14,000.
How a Sydney family saved $14,000 in CGT
Fifteen years ago, two parents purchased a property for their daughter so she could live in it while she studied at university. For the first five years, it served as her home. No rent was collected, and the parents absorbed all the expenses, loan interest, rates, insurance and upkeep, with no immediate tax benefit.
After their daughter graduated and moved out, the parents converted the property into a rental investment. Over the next ten years, they claimed deductions on the property’s holding costs, offsetting them against rental income. When the time came to sell, the property fetched $1.2 million. That was a strong financial return, but it also triggered a sizeable CGT liability because the property had never been their principal residence.
This is where their careful preparation paid off. Those first five years of expenses, previously non-deductible, were not wasted. Thanks to ATO rules, the family was able to add $75,000 of holding costs from the private-use period into the property’s cost base. By doing so, they reduced their taxable gain and ultimately saved almost $14,000 in tax at their marginal rate.
The hidden opportunity in “unused” costs
During those early years, the parents had been paying about $15,000 annually in loan interest, council rates and insurance premiums. Most families in their situation would simply accept these as unrecoverable expenses. But by keeping meticulous records of every dollar spent, they gave themselves a powerful advantage when it came time to sell.
The ATO allows certain expenses from years where the property was used privately to be added to the cost base. This directly reduces the size of the capital gain when the property is sold. For this family, the effect was clear: their taxable capital gain was reduced by $37,500, leading to nearly $14,000 in tax savings.
This illustrates an important truth in that the financial story of a property doesn’t start and end with the purchase and sale prices. It’s shaped by how the property is used across its lifetime, and by how diligently owners record and apply the costs involved.
What parents can take away from this
For parents buying property for their children, the lesson is clear. Every receipt matters. Even if an expense isn’t deductible now, it may become a valuable tool for reducing CGT later. Thinking ahead is crucial. What feels like a generous, family-driven decision today still needs to be structured with tomorrow in mind.
This doesn’t mean parents shouldn’t buy for their children. But it does mean understanding that property purchased for private use sits in a unique tax category. Without the right foresight, families risk missing out on legitimate savings. With the right approach, however, generosity can align with smart financial strategy.
Turning generosity into smart planning
What this Sydney family achieved wasn’t just a smaller tax bill. It was peace of mind, knowing that they had used every rule available to them to protect their wealth. Their story highlights how careful tax planning transforms outcomes. Not just at the point of sale, but throughout the life of the investment.
At Financial Spectrum, we see these scenarios often. Parents want to support their children, but they also want to make smart, sustainable financial decisions. That’s why we integrate property into a broader financial strategy, considering ownership structures, long-term goals, and the impact of tax. By doing so, we ensure that generosity today doesn’t become regret tomorrow.
Be smart with your next property purchase
Considering buying property for your children? Don’t leave the tax outcomes to chance. Book a confidential strategy session with one of our Sydney-based advisers today. Together we’ll map out a plan that protects your generosity, reduces risk and ensures your family’s wealth is working hard for the future.
Frequently asked questions
What is capital gains tax (CGT)?
CGT is the tax you pay on the profit from selling an asset such as property, shares or crypto. It’s part of your income tax, not a separate tax.
Can parents claim deductions on a property their child lives in rent-free?
No. While your child lives there rent-free, expenses like interest and rates aren’t deductible. But under ATO rules, you may be able to add them to the property’s cost base for CGT purposes when you sell.
What if the property is rented out after my child moves out?
Once rent is received, ongoing expenses can usually be claimed as deductions. Non-deductible costs from earlier private-use years may still be added to the cost base.
Do all holding costs count toward the cost base?
Not all. Items like interest, rates and insurance may qualify, but it’s important to check ATO guidelines or seek professional advice to be sure.
How can a financial planner help?
While your accountant manages the tax return, a financial planner helps with the bigger picture, structuring ownership, planning for timing of sale, and ensuring property decisions fit seamlessly into your broader wealth strategy.
Rebecca is passionate about promoting the positive impact of quality financial advice on personal wellbeing. Read her full bio here.
