Should you renovate instead of moving house?

Renovate or move? It's a question most of us will face at some stage when it comes to the family home.

For many of us it arises because we feel we need more - or differently organised - space. And if you're part of the sandwich generation the impetus can be the need to accommodate ageing parents or adult children - or both.

The cost of stamp duty

For most of us, the family home is our biggest investment, so we need to approach the renovate-or-move question with our head as well as our heart.

And the huge cost of stamp duty - more than $50,000 for many living in a big city - is a major consideration as this amount alone can go a long way towards a renovation. If you live in an area you enjoy, it's convenient and your property has the potential to provide the space you need, then it's worthwhile exploring the renovation.

Upgrading avoids the hefty buying and selling costs, which also include incidentals such as removalists and inspections.

Adding a granny flat

But renovating is far from easy. Planning and setting a budget are the keys to success. Don't skimp on the planning; for most it's well worth hiring an architect or design professional.

There is no point in increasing your space unless it suits your requirements.

Adding a granny flat, which can be up to 60sq m, to an existing home may be the solution. It could be used by adult children or elderly parents. And later, if your accommodation requirements change again, it could provide an income.

These secondary dwellings have become relatively easy to develop because of a relaxation in planning rules, but they vary from state to state and council to council, so you will need to check.

For example, in NSW the main qualifications are that the property has to be in a residential zone, with a land area of at least 450sq m and a 12-metre frontage.

Granny flats, which can be attached or detached, are not without their problems. Under current laws, a cash sum paid by one party towards a granny flat is a capital gains tax (CGT) event.

This means if your parent makes a contribution for the right to live in a granny flat, the sum paid creates a CGT liability for you when you sell. The 50% CGT discount is not available and there is no base cost to offset the proceeds, so the entire amount is subject to tax.

Granny flat agreement

Concern about paying CGT means some families fail to put formal agreements in place when a relative contributes to the cost of a granny flat.

This leaves the family member with no protection if the relationship breaks down and creates the potential for financial abuse.

To solve some of these issues, the October 2020 federal budget proposed CGT exemption for granny flats where a formal written agreement is in place. This will be limited to arrangements covering family relationships and disabled children - not commercial rentals. It's scheduled to start on July 1, 2021.

When it comes to reselling, a granny flat will reduce the size of your pool of potential buyers, say some real estate analysts, leading to a lower price than otherwise might be possible in a tight market.

Buying with parents

If your property is not large enough to provide more space, or the location doesn't suit, then buying a new home, or having one built, are your only alternatives. If your parents are contributing to the cost, it's important to have a formal agreement in place to protect everyone.

There are two ways you can buy a house with your parents: as tenants-in-common or joint tenants. Buying as tenants-in-common allows you and your parents to divide ownership of the property in whatever way you like, such as 60/40 or 70/30. If one party dies their share of the property is passed on according to the terms of their will.

This will help sort out inheritance issues if there are other siblings. But it could be inconvenient for the sibling sharing ownership with a parent, as they may be forced to sell when they don't want to so they can fulfil the terms of their parent's will.

Under a joint tenancy arrangement, ownership is split 50/50. If one joint tenant dies, their share of the property is automatically passed to the other joint tenant. This would suit everyone in the situation of a parent and only child sharing ownership but might cause a hassle where there are other siblings expecting an equal inheritance.

It's also important to have a written plan for future events such as aged care, possible employment-related relocations or if things just don't work out.

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