- Cost #1: Donation tax
- Cost #2: Transfer duty
- Other costs
Parents transferring property to their children is a common occurrence but it might cost more than you think.
Many parents decide to transfer the ownership of their house to their children before they pass away.
It often happens that parents are too old to maintain their home or they simply want their children to own the home instead of bequeathing it to them in a will.
This can be a financially beneficial decision for the children despite their age.
If they are still very young they already have a property in their name for when they reach the home-buying stage. If they are already homeowners, a second property is always an excellent investment.
According to South African law, the transfer of ownership of property is either seen as a donation or a sale.
In this case, parents aren’t selling the property to their children but rather giving it as a gift. As with any transfer of ownership, there has to be a contract set up and both the children and the parents need to sign it.
Because it is seen as a donation, it is taxed differently from a normal property sale. There are a few costs associated with the transfer of ownership and they should be carefully considered before doing the transfer.
Here is a simple breakdown of what to expect.
Cost #1: Donations tax
If the parent decides to transfer ownership of the property to the child then they need to pay donations tax.
This amount is based on the value of the house. Typically it is 20% and payable to SARS by the parent or the donor of the property.
The first R100 000 of the property will be exempt from the 20% donation tax. Thus the remaining balance of the house will be included in the donation tax. This is often quite a big amount that needs to be paid in a relatively short time span.
Make sure that you are well-prepared for this financial commitment.
Cost #2: Transfer duty
If the property is transferred from parent to child whilst the parent is still alive then they will have to pay transfer duty.
The child will then be responsible for paying the transfer duty and the amount is payable to the transferring attorneys.
Transfer duty is payable on the house’s value above R 1 million.
In the case of a parent transferring the property to their child, SARS requires two separate valuations of the home because the parties are related to each other.
When valuing the home, be sure to use a reputable agent to determine the right value for your home.
There are other costs that might be incurred depending on the circumstances.
If you still owe money on your bond, you will have to cancel the bond and pay the bond cancellation fees.
The bond must then be taken out in the recipient’s name to ensure that the transfer takes place. The recipient of the property might then also have to pay bond registration as well as transfer fees during the transfer process. They also need to make sure that they can afford the mortgage payments every month as the bond may still need to be paid off.
While it is advantageous for parents to transfer a property as a donation to their children, it might not be financially feasible. The last thing you want is for them to end up drowning in unnecessary debt. However, it is a wonderful idea if they are able to afford it. You know that your investment is in good hands and they have sure equity for their own future.