Buy IP in my name or jointly with wife?

Discussion in 'Accounting & Tax' started by shrimp42, 7th Aug, 2020.

Join Australia's most dynamic and respected property investment community
  1. shrimp42

    shrimp42 Member

    Joined:
    4th Jun, 2020
    Posts:
    10
    Location:
    Sydney
    Hi! I'm looking for advice for the most tax efficient way of setting up our recent IP purchase. Here is our situation:

    PPOR in joint names.
    Recently purchased IP(mortgage of $696k P&I @2.49% over 30 years, yet to be decided who is going to be on the title.
    Me currently earning $230k, wife currently low income <18K per annum and not looking to earn more.
    Expected rental income $36,400 per year. Deductions estimated to be around $30,000 per year.

    I believe it's more tax efficient for the property to be in my name only, to make the most of the tax deductions seeing as I'm on the highest marginal rate. My wife thinks it's more tax efficient if we buy the property 50/50 as the earnings and deductions will be split equally.

    As the property is basically cash flow neutral, does it really matter? My concern is that, although it appears to be cash flow neutral just now with interest rates being so low, over the next 30 years if/when interest rates increase, it will be negatively geared, so it's better for me as the higher earner to have all the deductions.

    This is because,(please correct me if I'm wrong) if we want to change who is on the title in future, we will have to pay stamp duty again?


    Could anyone advise as to the best strategy or something we have missed/overlooked? Thanks in advance
     
  2. Mark F

    Mark F Well-Known Member

    Joined:
    29th Jan, 2020
    Posts:
    1,029
    Location:
    Canberra
    Your proposal is better if the property is negatively geared. Your wife's proposal is better at some point in the future when the benefits of her 17% tax rate delivers more free cash than your 47% marginal tax rate.
     
  3. JasonC

    JasonC Well-Known Member

    Joined:
    14th Mar, 2017
    Posts:
    256
    Location:
    Sydney
    You say recently purchased
    - so have you signed a contract already?

    Regards,

    Jason
     
  4. Ravi Gupta

    Ravi Gupta Active Member

    Joined:
    19th Apr, 2020
    Posts:
    34
    Location:
    Australia
    Over the years your loan balance would go down.
    If property is neutral geared today there is high chance it will be positive geared in future. Interest rates going up indicates inflation is up hence rents also likely to go up.


    Correct.

    Splitting 50/50 may be a good idea.
     
  5. shrimp42

    shrimp42 Member

    Joined:
    4th Jun, 2020
    Posts:
    10
    Location:
    Sydney
    Hiya, yes contract is signed. Mortgage is in both our names, so in the next few days, before settlement in September, we wanted to speak with our solicitor about changing the names on the title of it’s better for tax.
     
  6. shrimp42

    shrimp42 Member

    Joined:
    4th Jun, 2020
    Posts:
    10
    Location:
    Sydney
    Thanks for your reply, following that reasoning, as the interest will be decreasing each year as a P&I loan, and the property will be more and more positively geared, assuming my wife doesn’t return to work, maybe it’s better to put the title in HER name only?
     
  7. Ravi Gupta

    Ravi Gupta Active Member

    Joined:
    19th Apr, 2020
    Posts:
    34
    Location:
    Australia
    Yes. that's better.
     
  8. Gockie

    Gockie Life is good ☺️ Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    14,742
    Location:
    Sydney
    How long ago did you sign?
    It may be too late to change things. You say you have a mortgage (so that means a loan arranged).... I think you’re too late. If you were in cooling off then it wouldn’t be an issue.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    What about the legal aspects?
     
  10. Ravi Gupta

    Ravi Gupta Active Member

    Joined:
    19th Apr, 2020
    Posts:
    34
    Location:
    Australia
    It is possible provided vendor agrees(I don't see why not). Approach vendor via your solicitor.
    I have done this in the past. (Changed title between spouses prior to settlement).
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    So you had legal advice to avoid further duty? What then is a contract if it can be altered or re contracted?
     
  12. JasonC

    JasonC Well-Known Member

    Joined:
    14th Mar, 2017
    Posts:
    256
    Location:
    Sydney
    I’d be seeking legal advise as to whether or not changing the name in the contract would incur a second lot of duty (or 1.5 times duty).

    Regards,

    Jason
     
  13. Firefly99

    Firefly99 Well-Known Member

    Joined:
    24th Jul, 2020
    Posts:
    1,727
    Location:
    Qld
    I don’t think you can change the contract once it’s been signed.
    Anyway I’d go 50/50. You may have the higher income now and the house will start off negatively geared but you don’t know what the future will hold. Also need to consider CGT when you sell.
     
  14. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,130
    Location:
    03 9877 3000
    Initially most properties are negatively geared and it makes sense to be in the higher income earners name.

    Hopefully the property becomes positively geared at some point, from then on it would be more efficient to be in the low income earners name.

    Very long term the property might be a source of income in retirement, when neither person has an income. At that point it's probably best of to be 50/50.

    If you sell the property at some point, the capital gains tax will really mess with your calculations. Never mind that the personal tax rates are going to change in a few years.

    Essentially there's no ideal answer using income tax as a metric for the question of ownership.

    I can't advise on the asset protection considerations, but my observation is that for most people it's a very low risk and mitigation comes at a significant expense.



    Perhaps focus on your overall investment plan. If this is the only investment property you'll purchase, 50/50 is probably going to be the most balanced.

    If you intend to build a portfolio over time, at some point land tax is going to be relevant. In this case owning a property in one name, then another property in the other name can get a more cost effective outcome.

    In summary, educate yourself in the implications of land tax an how it affects your long term plans.
     
    Archaon, craigc and Jmillar like this.
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    There is no need to change the contract, settlement can be in a different name. Unlikely to be any duty except if a qld property.
    Loan will need to be redone if one owner because a non owner cannot give a mortgage, but they might be a borrower. Check with your broker.

    No one has mentioned cgt
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    Firefly did!
     
  17. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,130
    Location:
    03 9877 3000
    :p
     
    craigc and Jmillar like this.
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    So did Peter!
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    And divorce can unwind all the tax planning

    eg Property is in Jacks name only. On divorce is ordered to be a asset of Jills and treated for tax purposes as if Jack never ever owned it.
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    Family law property settlements are something used as ways to tax effectively restructure