Related Party Property Transfer

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A related party property transfer occurs when an owner or their family member transfers ownership of a property. The transaction can be subject to various costs such as stamp duty (unless a concession or exemption applies) and bank fees. It is important that a property valuation report from a registered property valuer be obtained to determine the correct stamp duty payable. If the property has a mortgage attached, a discharge of the existing mortgage will be required to complete the transaction. Various other legal and conveyancing costs such as lawyer’s fees, title registration and lodgement fees should also be taken into account.

What qualifies as a related party transaction?

It is common for people to exchange properties with their family members. The Internal Revenue Service has recently clarified its position on this type of exchange in Revenue Ruling 2002-83. Basically, the IRS does not want taxpayers to purchase replacement property from related parties as this creates a great opportunity for tax abuse.

The term “related party” is defined in IRC Sections 267(b) and 707(b). It includes siblings (including half siblings), spouses, ancestors and lineal descendants. It also includes entities such as partnerships, limited liability companies and corporations in which the taxpayer owns more than 50% of the stock, membership interests or partnership profits interest. However, it does not include aunts, uncles, in-laws, nieces or nephews.

It is possible to exchange properties with relatives as long as the taxpayer holds the relinquished property for a minimum of two years and acquires like-kind replacement property from non-related parties. However, it is still important to consider the ramifications of the transaction and to consult with your tax advisor.