CGT Calculation on Tenants in Common

If 3 individuals (Person A, B and C) are TiC on a property that was purchased for $700k and sells for $1m, and only 2 individuals (A and B) received the $300k gross profit ($150k to A, $150k to B), is Person C still liable for CGT on their share of the realised gain ($100k) ?

In other words is CGT payable by those receiving the funds or by dividing the profit equally among all owners?

 

Assuming no trust relationships Yes. It is irrelevant who receives the profit. they will be taxed on their legal shares of the profit.

 

In some situations all 3 could be taxed on the profit of 400k

 

How is tax applicable if you did not receive the taxable income?

 

Are you saying both scenarios are possible?

 

They are legally entitled to the income.
Similar to if you employer deposits your wage into your spouse's account.

 

You cant disregard legal ownership. If you didnt want a owner to share in the rental income and expenses and any profit they should never have become a owner. The title deed acts like a unwritten agreement that reflects share of ownership.

One benefit is the A B and C each get a share of income. But they cant choose now to change it to either a different % share or a different basis.

 

Is it possible to remove an individual from a title but they are still left on the mortgage? eg. Title: Persons A + B,
Mortgage: Persons A + B + C

 

Yes. A CGT and stamp duty trigger however. The loan must be refinanced as well. The lender may be a obstacle if the other party must assist to service the loan

 

No.

Only a legal owner can mortgage a property.

They could possibly be on the loan but you are unlikely to find a lender willing to allow this except perhaps if spouses to one of the owners

 

@Terry_w

My question to the lender:

Hi,

Can you please tell me if it is possible for an individual to be removed from a title but still be left on the mortgage?

Assuming a loan with 3 individuals, with all 3 on the title as well.

The outcome would be:

Title: 2 individuals
Mortgage: 3 individuals

Is this possible?
​

Their response:

We advise that this scenario is possible providing the individual being removed is still remaining as the Borrower. This will be subject to the execution of Letters of Acknowledgement but no new mortgage will be required.

If the individual being removed from the title does not wish to remain as a Borrower on the loan, then the loan would need to be re-originated into the 2 remaining individuals.
​

What do you make of this?
This is Westpac

 

Sounds good.

Think of the tax consequences though.

 

Would this need a guarantee from the individual not on title?

 

No as they are borrower and not an owner (so have nothing to guarantee_)

 

My concern with the tax deductibility side is like this:

$600,000 loan
3 people
1/3 deductible interest to each

loan changes to $600,000 with 2 owners
how much is deductible to those 2 owners?
possibly 1/2 of the interest on $400k each
but did those 2 owners purchase the share of the 1/3 owner? If so how did they pay for this share?
Could it be argued that they borrowed by taking a greater share of the loan? No, because the loan hasn't changed the 3rd borrower is still on there as a borrower so the other 2 didn't borrow to pay him/her out.

The 3rd borrower cannot claim anything because not an owner.

 

As Terry said, loan and title will impact the existing owners. The CGT trigger for one being removed from title and stamp duty for other two to acquire their interest all needs to be addressed as does refinance of the former loan with the replacement loan. However current market value of the property must be used which may vary from the historical share of the loan.

Eg Former loan $600k (3). Property was worth $800K.
Now worth $1m... One third of $1m = $333,333. However share of the loan was $200K....So buyout means a new loan sum for the shortfall ?

 

Person C - no money in (signed on for loan serviceability), nor expecting money out, aiming to get off the mortgage and title without a) any debt, b) a tax liability

What are your thoughts on this aim?

@Terry_w

 

It's a good aim but has consequences

 

Private ruling land ?. I would argue its a issue for stamp duty exemption too. Its like trying to argue C held title interest as a trustee for A / B and acted solely as a guarantor and you never formally did this day one.

It would have been clever to run this past a solicitor when buying. The common practices have been ignored and to argue it now is a little harder and a lot more costly to fix. The apparent purchaser issues need legal advice. When its done at day one the agreements are signed and stamped by OSR so later you can revert ownership to A / B. To now "find" such an agreement meets scepticism.

Failing that C is a owner, is a borrower and there are duty and tax consequences. You cant just ignore it because you want to or thought that what you agreed. Thats avoidance.