Should we sell or rent our elderly mother’s house?

My two siblings and I decided to rent our mother’s house out a year ago to pay for the dementia-care unit she had to go into. This was working out OK – pretty much breaking even and not having to use her savings of $60,000. Until recently, when we realised her tax bill will be nearly $12,000!

The house is worth about $1.7 million and the tenants are paying $850 per week. Our mother is still in good health, despite the dementia, so the care costs could go on for another decade. Should we sell the house? Or are there other options we haven’t thought of?

I would start by questioning the estimated tax of $12,000. Given the amount of rental income you describe, and assuming your mother qualifies for the Senior Australian Tax Offset, I would expect her tax to be a fraction of this, unless there is other taxable income that you have not mentioned.

As your reconsideration of the current strategy would appear to flow entirely from surprise around the tax liability, an error in the estimate here appears quite foundational. The attraction in retaining your mother’s home is that this likely maximises the value of her estate, as the property will probably increase in value over time.

You should certainly obtain advice from a tax accountant here. I would expect the property will retain the CGT main residence exemption for six years, but beyond that point, tax on growth in the value of the asset would apply. This isn’t necessarily a problem, but something you and your siblings should be cognisant of, so there are no surprises down the line.

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Given you have indicated that all the income being received is required to pay for your mother’s care, there could be a problem in the future when the property requires maintenance. A sale could become necessary if there is no ability to fund these costs.

Were the property to be sold it would certainly be possible to establish an investment portfolio that pays out a fixed amount monthly to cover her care costs. This payment amount could be adjusted as her fees rise over time. Such a portfolio would have the attraction of minimal ongoing costs, however, as with the rental income, it would still be assessable for tax.

Finally, it would be worth exploring the impact of retaining the home on your mother’s age pension (if applicable), and especially her care fees. This is a specialist advice area and outside my expertise. But you would certainly want to know in advance if selling the house would lead to a cut in her pension or a change to the fees she is required to pay.