Changing ownership from joint tenants to tenants in common

Got into an interesting conservation over Saturday lunch...

A young couple has nearly paid off their current residence (possibly with outside help but that's besides the point), they are about to move into their second property that is closer to work (new mortgage). Naturally the first property will become a rental, no doubt positively geared.

It would probably make more financial sense if they stay put, and rent out the second property instead as an investment. But for various reasons they want to move.

They are also planning to have a baby or two, the wife is prepared to become a stay at home mom for some years to come.

Then there was this light bulb moment...

The couple are joint tenants of the first property, what if they change ownership to tenants in common - husband 99%, wife 1%? To maximise tax benefit.

But that won't work right? Because tax benefit is only applied on the interest portion of outstanding mortgage, and in their case stamp duty will negate any tax saving from the little mortgage they have?

The conversation went on...

Can they sell the first property to the husband and use the proceed to pay for a large part of the second property? The husband will have a full mortgage on the first property to take maximum tax benefit. Is that even allowed? To sell something that you already part own to yourself?

Possibly a viable option is to setup a company, the company is to take up a loan to buy the property. Then again, this new company will probably have a hard time to get a loan from the bank.

Any thoughts?

(If nothing else, the prolonged conversation did bring dessert and coffee )

 

Selling to the husband will incur stamps etc, will also be a cgt event.

Interest is NOT deductible if the new property is their ppor

Maybe one of the accountants can chip in here and confirm

 

I've written about this extensively. See
Strategy: 11 Strategies for when you move out of the PPOR and keep it Strategy: 11 Strategies for when you move out of the PPOR and keep it

Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW

Tax Tip 100: Transfers between Spouses and CGT https://propertychat.com.au/community/threads/tax-tip-100-transfers-between-spouses-and-cgt.9275/

 

I am not an accountant, but this is legal advice so ok.

Stamp duty on the transfer of land is never deductible,
CGT may be triggered but it would be tax free because of the main residence exemption
The interest CAN be deductible if the new property is their main residence.

But seek legal advice before trying this at home.

 

Thanks Terry, very detailed explanations. It was a seemingly random discussion over lunch, but turns out to be a valuable one as I learn a few things as well.

So basically there are 3 strategies:

Option 1: Do nothing (hardly a strategy) - move into the new (second) property, rent out the first (previously PPOR). Very little tax benefit, especially considering if the wife stops working, only half of the interest expenses from the rental property attracts tax benefit (though the wife will probably not need to pay tax on her half of the rental income due to below the threshold). Meanwhile they will be paying lots of interest on their new PPOR.

Option 2: Sell the first property - being the previous PPOR there's no CGT implication. Pour the proceed into the second property (their new PPOR). They can then look for a suitable investment property and to set it up in the correct structure, i.e. husband 99%, wife (not working) 1%. This is probably an easier and safe option.

Option 3: Transfer the joint tenants ownership of the first property to mostly under the husband. Say if the property has a market value of $1m, the wife transfers her share ($500k) to the husband, so $18k in stamp duty (it's not calculated base on $1m right? Would have been $40k in stamp duty).

Option 3 doesn't sound as bad, because selling the property (option 2) would incur $20+k in agent fees and advertising to sell, plus paying stamp duty again on the future investment property. The other issue is that since they have already paid off 80+% of the first property, the husband's half which is roughly 40% is locked in. In other words, only 60% of the first property is attracts tax benefit. Which also means that 40% of first property couldn't be cashed in to pay for the second property.

Is my understanding correct?

 

I just thought of another issue, this investment business is so complicated, but also quite mind intriguing.

While I don't know how much they paid for the property some years ago, my guess is around $500k. Even thought the property is worth much more in today's market, I don't think they can simply "top up" the loan, use the money for something else (i.e. to pay for the second property), while claiming tax deduction on the new "top up".

Which means they won't have access to the $1m (use it to reduce mortgage on new PPOR) unless they actually sell the first property, correct?

 

Correct

 

Not bad, but you have left off another 10 or so strategies.

Also I would avoid 99/1% ownership.
Legal Tip 68: Avoid 99%/1% ownership of property Legal Tip 68: Avoid 99%/1% ownership of property

Also if there is a jointly owned property and the loan is increased to buy out part of one owner the interest won't be deductible - only half of the original interest would be deductible.

 

Interest on a ppor? Deductible? I thought the nature of the funds being used for ppor and not investment means non deductible interest?

 

Where one spouse borrows to buy out the other spouse and that property becomes a rental the interest could be deductible from that point. Even if the release funds are then used to pay down the new main residence loan.

 

Thanks Terry for all the interesting and valuable reads.

We have an off the plan IP coming up end of next year, it's joint tenants (my wife and I). It was initially my wife's (she paid the deposit and it was meant to be her investment), but after some number crunching she realised that she can't afford it (duh), so my name was added as joint tenants (a new contract after rescinded the one she signed).

Thinking about it, should have made it my investment. Not sure if it's too late to change again.

 

In Nsw could be settled in your name only for an extra $50 or so. Tell your lawyer s58 duties act if they resist. Loan can still be both names.

 

Thanks Terry, would it be much different in Queensland (if you happen to know)?

 

Yes different up there. I don't know the details though

 

No worries, thanks for all the help so far.

Property ownership is such a double edged sword, if I change to single owner to maximise negative gearing benefits, CGT will bite big time when it comes to sell.

 

Consider both the short and long term. How long would it be negative for v how long will you hold it