Strategy: Buy the Main Residence in One Name only

Strategy: Buy the Main Residence in One Name only


Couples should consider getting the main residence in one name only rather than two names. There are many reasons for this with most of the reasons I have explained in this thread about investment properties applying to main residences as well:

Strategy: Buying Investment Properties in 1 name only Strategy: Buying Investment Properties in 1 name only

and
Strategy: 50% Spousal Transfer Strategy to Increase Deductions Strategy: 50% Spousal Transfer Strategy to Increase Deductions

An additional reason for main residences in one name only is to increase deductible interest by doing a spousal transfer.


Increasing the Deductible Interest

With a spousal transfer one spouse can borrow to buy off the other spouse. Therefore, interest on this loan can be deductible when the property becomes income producing. (seek tax advice on Part IVA and other issues).


Imagine Marge and Homer live in NSW in their $1mil home which has a low loan of $200,000. It is solely owned by Marge and has always been the family’s main residence.


They want to move to a new home but want to keep this one as it has ‘development potential’. But they don’t have any cash for the new home so they will need to borrow about $1,050,000 to buy the new one. That is a lot of non-deductible interest!


Instead they decide to use the spousal sale strategy. Homer wants to buy 50% of the property from Marge. If he does this before moving out there will be no stamp duty for Homer. If Marge sells this property in part of or in full there will be no CGT as it has always been her main residence. Their only costs would be some legal and tax advice, conveyancing and some loan fees.


They draw up contracts and Homer buys 50% of the property for $500,000. Homer borrows the full amount using the property as security and both of them on the loan.


Marg is selling half of the property so her loan will need to be reduced to $100,000. And Homer’s loan is $500,000. At settlement they become joint owners either tenants in common 50/50 or joint tenants. Homer hands Marg $500,000 cash which he has borrowed.

Their position now is a $600,000 loan with $500,000 in the offset


They remain there for a bit while looking for the new main residence. This will also allow them to use the 6 year rule going forward. If they had done the transfer immediately before moving out the 6 year rule could only apply to the 50% of the property and not the whole.


Once they find the new home the $500,000 from the sale is used to purchase it – see my other tip on always borrow as much as you can for every property.


The extra deductible interest would be the interest on $400,000. At 5% pa this would be $20,000 per year in extra tax deductions – every bloody year while the property is rented and the loan is this amount. If on the top tax rate this would be almost $10k cash in their pockets each year. This is cash which could be used to reduce the debt on the new main residence.


Note that this strategy can work in states other than NSW, but stamp duty would apply in both QLD and VIC.


On the 6 year rule see:
Tax Tip 23: The 6 year Absent from Main Residence Rule Tax Tip 23: The 6 year Absent from Main Residence Rule

 

Terry, should that be $400,000 in the offset as $100,000 was used to pay down $100,000 of the loan?

$600,000 loan + $400,000 in offset = $200,000 debt

 

Yes. Thanks for finding the neK.

 

As always very helpful idea Terry.

"Note that this strategy can work in states other than NSW, but stamp duty would apply in both QLD and VIC."

Is there any reason this only works in NSW?

 

It can actually work in any state, but in VIC and QLD it would result in stamp duty being payable. but that doesn't necessarily mean you shouldn't do it in these states.