"We'll sell the house to the kids and keep living in it": why this family arrangement usually goes wrong

It comes up in a lot of family conversations: the parents sell the home — often below market value — to one or more adult children, then continue to live in it, sometimes paying "rent". On the face of it, it looks neat. The kids get a property they couldn't otherwise afford; the parents free up cash; the eventual estate is simplified; and, the family thinks, the Age Pension assessment improves. In reality, the arrangement sits at the meeting point of three sets of rules that don't play nicely together — Centrelink deprivation, the granny flat or right-to-occupy framework, and the Capital Gains Tax (CGT) and rental rules between related parties — and is layered on top of a serious family-risk problem: once the home is in the children's names, a divorce, a bankruptcy, a falling out, or a premature death of a child can leave the parents legally exposed to losing their home. There are narrow cases where the structure can be made to work with careful documentation, but in most situations the cleaner alternatives — a proper granny flat interest, a registered life interest, the Home Equity Access Scheme, or simply downsizing — achieve the underlying goal with far fewer traps. This article walks through what actually happens, and why the cleaner alternatives are usually the answer.

What is trap one — Centrelink deprivation?

If parents sell the home for less than market value, the discount is treated as a gift. Within Centrelink's gifting limits — $10,000 a year, capped at $30,000 over five years — there is no effect. Above that, the excess is treated as a deprived asset, still counted under the assets test and deemed to earn income for five years, exactly as if the parents still owned it (Services Australia, https://www.servicesaustralia.gov.au/how-much-you-can-gift). The figures are usually large enough to wipe out any pension improvement entirely: selling a $1.2 million home to a child for $800,000, for instance, creates a $400,000 gift, almost all of which is deprivation. Five years of having that counted against you almost always defeats the whole point of the exercise.

What is trap two — the granny flat or right-to-occupy framework?

If parents pay a child in exchange for the right to live in the property, Centrelink applies its granny flat interest rules. There is a "reasonableness test": the reasonable value of the right to occupy is worked out as the combined annual partnered pension rate multiplied by an age-based conversion factor that decreases with age (for a couple, the younger partner's age is used) (DSS Social Security Guide 4.6.4.60, https://guides.dss.gov.au/social-security-guide/4/6/4/60). Pay more than that reasonable amount, and the excess is also deprivation. The structure most families propose — a price discount plus continuing to live in the home, sometimes with "rent" — doesn't cleanly fit either a market sale or a documented granny flat interest, so it can fall between the two, picking up deprivation on the discount and further problems on whatever is paid for the continued occupancy.

What is trap three — CGT for the parents and the children?

The parents themselves usually keep the main residence exemption on the sale of their home, so their gain isn't taxed (ATO, https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-capital-gains-tax/your-main-residence-home) — that part typically isn't a problem. The harder problem is on the child's side. While the parents continue to live in the home, the child owns it as an investment property, not as their own main residence, so when the child eventually sells, CGT applies on the entire gain since they acquired it, with no main residence exemption. And the price discount the parents gave has been baked into the child's CGT cost base, meaning a lower cost base and a larger future CGT bill — the discount, in effect, becomes deferred tax the child pays later. Stamp duty is also unavoidable in most states, and revenue offices commonly substitute market value where a related-party sale is priced below it, so the discount doesn't even reduce the stamp duty bill.

What is trap four — the rental rules?

If parents pay market rent, it is straightforward: assessable rental income to the child, with normal deductions available against it. The trouble is most families want to pay below-market rent, on the basis that "it's the kids' parents, not a real tenancy". The ATO treats below-market rent in a related-party domestic arrangement as not genuinely income-producing, which means the child loses the ability to claim deductions for interest, rates, depreciation, and repairs against the property — while the below-market rent is still assessable. That is typically the worst-of-both-worlds tax outcome for the child, and one most families don't anticipate.

What is trap five — family risk, the worst of all?

Once the home is in the children's names, it is the children's asset, not the parents'. If the child divorces, the home is a matrimonial asset, and the parents' continuing right to live there may be unenforceable or treated as a debt to be repaid. If the child becomes bankrupt, the home is available to creditors. If the child dies before the parents — and without a carefully drafted will — the home may pass to the child's spouse or other beneficiaries, not back to the parents. A family falling-out can leave the parents legally vulnerable, especially if their right to occupy isn't formally documented and registered. A registered life interest, a formal lease, or a properly documented granny flat interest can mitigate these risks, but the parents have still given up ownership of the most important asset they own. For most retired people, walking through what happens if a child's marriage ends is the moment the appeal of the arrangement disappears.

What are the cleaner alternatives?

The cleaner alternatives address the underlying goal without the same risks. If the goal is to release cash while staying in the home, the Home Equity Access Scheme (the government scheme paying fortnightly amounts or lump sums secured against the home) or a commercial reverse mortgage keeps the parents in ownership entirely. If the goal is to simplify the estate and leave the home to the children, the children typically receive the home through the estate anyway — with stamp duty avoided and CGT cost-base resets often available — making a lifetime sale unnecessary and worse. If the goal is a paid right to live with family, a properly documented granny flat interest, structured to fall within the reasonableness formula, is the correct mechanism rather than a sale-and-leaseback. If the goal is to help the kids onto the property ladder and the parents can afford to gift, a direct gift within the allowable limits plus a will provision is cleaner and doesn't put the parents' home on the line. And if the goal is to release cash and adjust the home, downsizing — selling at market value (main residence exemption intact), buying a smaller home, and contributing up to $300,000 each into super under the downsizer contribution rules (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/how-to-save-more-in-your-super/downsizer-super-contributions) — is usually the strongest answer.

What do these family-sale traps look like in practice?

These two cases show the family-sale traps. They are illustrative only and not personal advice.

Maeve and Devlin, both 70, own a home worth about $1.2 million. Their daughter and her partner can't afford a place, so the family suggests Maeve and Devlin sell the house to them for $800,000, staying in the home for life and paying $400 a week "rent" (below market). On these facts, the structure is a textbook example of how things go wrong. The $400,000 price discount is a gift; the allowable $30,000 over five years is consumed instantly, with about $370,000 treated as a deprived asset for the next five years — counted under the assets test and deemed to earn income against them (Services Australia, https://www.servicesaustralia.gov.au/how-much-you-can-gift), almost certainly costing them more in Age Pension than they gained. The continuing right to occupy layered on top is messy — it is not a clean granny flat interest, and Centrelink may scrutinise any "rent" against the reasonableness formula (DSS Social Security Guide 4.6.4.60, https://guides.dss.gov.au/social-security-guide/4/6/4/60). The below-market rent ($400 against perhaps $700 a week market) means their daughter can't claim the rental deductions the property's interest, rates, and depreciation would normally allow, while the rent is still assessable income to her — a very poor tax outcome. The daughter inherits a low CGT cost base ($800,000), so there will be CGT on the full gain when she sells. And underneath all of it, the family-risk problem — if the daughter's relationship ends or she runs into financial trouble, the parents' home is on the table. On these facts it is generally rational to take the family through each trap calmly, then introduce the alternatives — most likely a Home Equity Access Scheme drawdown (keeps the home in their name and gives them cash to help their daughter), or a direct gift within the allowable limits plus a will provision.

Roisin, 72, decides to do "the same arrangement but properly": she sells her home to her son at full market value ($1.5 million), obtains an independent valuation, and her son charges her full market rent ($800 a week) to live there. On these facts, the deprivation trap is largely avoided (no gift component, because the sale is at market) and the rental-deduction problem is avoided (market rent, so her son can negatively gear). The proceeds are now in her name and assessable — she may need to plan around the assets-test impact of holding $1.5 million in cash or investments where she previously had an exempt home. But the child-side CGT issue remains: no main residence exemption while she lives there, with CGT on the full gain when her son eventually sells (ATO, https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-capital-gains-tax/your-main-residence-home). Stamp duty is paid at full market value. And the family-risk dimension is still completely present — if her son divorces, becomes bankrupt, or dies first, her right to remain depends entirely on the strength of her registered life interest and lease documents. Even in this "done properly" version, Roisin has converted an exempt home into assessable cash and rent payments, and put her continuing right to live in the house at the mercy of her son's life circumstances. On these facts a simple downsize — selling at market value, buying a smaller home in her own name, and contributing surplus into super as a downsizer contribution (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/how-to-save-more-in-your-super/downsizer-super-contributions) — would have achieved the same cash release without the family-risk problem.

For retirees considering a family sale-and-leaseback, the strong message is that the structure is rarely the right answer. The work is to identify the real goal (cash, helping children, estate simplification, or asset-test reduction); to walk methodically through each trap — Centrelink deprivation on any below-market discount, the granny-flat reasonableness rule on payments for the right to live there, no main-residence CGT exemption for the children while parents occupy, no rental deductions on below-market related-party rent, and stamp duty at market value regardless — and then, most importantly, to address the family risk of divorce, bankruptcy, premature death, and disputes, which documentation can mitigate but never fully remove. In nearly every case there is a cleaner alternative for the underlying goal: the Home Equity Access Scheme or a reverse mortgage for cash, downsizing with a downsizer super contribution for the upgrade-and-release combination, a properly documented granny flat interest for a paid right to live with family, or direct gifts within the allowable limits plus a will for transferring wealth to children. The figures and rules move with policy, so verify the current gifting limits, reasonableness formula, downsizer cap, and state stamp duty treatment before relying on them — but the shape of the warning is durable. The "family arrangement" framing is what makes this structure so persuasive at the kitchen table and so dangerous on paper.

Sources

• Services Australia — How much you can gift
• DSS Social Security Guide 4.6.4.60 — Granny flats: reasonable value conversion factors
• ATO — Downsizer super contributions
• ATO — Your main residence (home) and CGT