Ask Paul: Give my sister $500k to live rent-free - or invest?

Would you hand over $500,000 to a sibling for a rent-free deal? Paul Clitheroe is sounding a warning bell at this family's plan.

Reader question

Dear Paul,

I am resigning from my job shortly due to ill health. I have sold my home and now renting a unit from my sister and her de facto partner.

My sister has a mortgage on this unit, which was previously rented for $700 a week.

My sister suggested that I give her $500,000 to put into her offset mortgage account and in return, I can stay rent-free.

If I should need to go into aged care, then these funds will be used for my upkeep. - Urban

Paul's response

Warning, warning! This sounds like a lovely simple idea, Urban, but my job is to point out risk.

The $500,000 in her offset sounds very fair, she is probably paying 5.5% to 6% interest and, in effect, your contribution would effectively be about this amount. It also means she has no taxable income from you that you would pay in rent. But now to my list of problems.

How will this impact your sister if, for example, the property costs are a tax deduction for her? The ATO will take a dim view of her claiming costs with no taxable income and no taxable income for you on the $500,000.

What really concerns me is if an unexpected event happens. This could include your sister and her de facto splitting. The $500,000 would go into her offset, unless documented as a loan, it is hers. This would potentially add to her assets in a break-up. Then what happens if for whatever reason the money is taken out of the offset? How do you get this important capital back?

I know I am being a nasty person here, Urban. I'm sure you have a loving and open relationship with your sister. I find that if the downside is discussed and documented, it tends not to happen.

Before you do anything, and I'm sure your sister will agree, it is off to a solicitor to get this agreement documented so that in any catastrophe, your $500,000 is secure and comes back to you.

I apologise again, but more than 40 years of chatting to people about money, it is quite extraordinary how often things go unexpectedly wrong. Professional time with a solicitor and documenting any agreement is best for both you and your sister.

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