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Strategy: Buying Investment Properties in 1 name only

Discussion in 'General Property Chat' started by Terry_w, 9th Nov, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Rather than jointly buying investment properties there are many benefits to the buying of properties in single names. Spouses can take turns buying to even things up a bit, but there are several benefits such as

    Spousal Transfers
    In same states spouses can transfer title with no stamp duty payable. This means Spouse A can sell to Spouse B and release equity doing so. Those funds can be used to pay down the non deductible home loan debt with Spouse B borrowing to acquire the property and deducting the interest. CGT may still be payable, but this can be reduced.

    Spousal Loans
    Spouse A can lender Spouse B money to buy the property. Market interest rates can be charged and this can enable a greater deduction to the higher income spouse with lower or even no income tax to the other. Tax arbitrage. Careful planning is needed as is good advice.

    CGT can be Minimised
    Where a property is owned jointly and it is sold both owners will be hit with a CGT event. Where there is one property owned separately by each spouse CGT can be timed by decided which property to sell.

    Death
    If one dies they can leave their property to the other one via a testamentary discretionary trust. Great asset protection as well as a double whammy of tax benefits with all the usual benefits of a discretionary trust plus the children being taxed as adults from the income.

    Increased Asset Protection
    With joint loans each borrower is liable for the whole debt. So if something bad happens both spouses could end up bankrupt and all properties owned lost. With separately owned properties if each only had the owner on the loan then if things went back on of the spouses may go down with the other untouched. Only half the family assets may be lost.

    Increased serviceability
    With jointly owned property both spouses must go on the loan or guarantee the loan. This means each is liable for the whole debt. But each is only legally entitled to half the income, or the income of their share. So if one of the spouses were to go out on their own to buy one property then they would be severely restricted because of the huge income.

    Each going their own way
    Sometimes on spouse is more aggressive than the other – sometimes in the area of investing. Going separately means the risk adverse spouse can be more conservative. Things can be structured so that the spouse with the least assets can do that risky development too – if it fails there is less to lose.

    Family Law
    Should the couple decide to split it will be easier to divide things up. It will be also more straight forward in working out contributions, or who paid for what.

    Land Tax
    Purchasing jointly in some states, such as NSW, will mean you only get one land tax threshold between you. Buying in separate names means you get one each.


    Disadvantages
    There are some disadvantages such as loss of control. Where B owns a property without A’s involvement then B could deal with that property without A’s knowledge or permission. B could
    - Sell
    - Rent
    - Leave the property to a third party at death
    - Mortgage
    - Further borrow against

    the property without A’s knowledge. B could get a LOC and gamble it away and then die and leave the property to Uncle Harry at death, for example.

    However not contributing to the property may mean there is no caveatable interest for the non-owner. Otherwise the non-owner could lodge a caveat.

    Combining some of these
    Planning ahead a husband and wife team start off by buying properties alternately in each name. The wife owns the main residence and 2 investment properties and the husband owns 3 rental properties.

    Each just stay under the land tax threshold in NSW. The wife may be off work on maternity leave and one property in her name could be sold with lower tax resulting. If things are timed well she could even prepay the interest on the 2nd property to bring her income down further.

    Once one investment property is sold the wife uses that to pay off part of the owner occupied home loan. She had already split this into several splits at the start and realises she can use the splits to invest without contaminating the remaining loan. These loans have redraw so she can start a debt recycling strategy even though she may no longer qualify for new borrowings – the redraw funds can be taken out again.

    The first thing she does is to lend the husband money under a commercial loan agreement at a market interest rate. The loan is unsecured so she charges her husband 12%. The income she receives is not taxable, or may be taxable depending on how much the CG was but her tax rate is still lower than her husband’s top rate of 47%. Extra income from the interest is used to pay off her non deductible loan. She also takes this opportunity to borrow to pay the interest on her other investment property. She does not have enough funds to do this otherwise.

    The husband gets to claim the interest he pays the wife as a tax deduction because he has borrow the money to pay for investment expenses. This leaves him with more tax savings.

    Before doing all this she has sought legal and taxation advice from their lawyer.

    much later...

    Later, after 20 years, or so the wife dies… leaving her main residence to the trustee of a discretionary trust which the husband controls. She debated about making the trust optional in her will, but decided against it in case her husband remarried again. This is exactly what he did, marrying a girl half his age. But the terms of the will trust specifically excluded any new spouse from every receiving benefits from either income or capital from the trust. The trust also contained a life tenancy for the husband and this allowed the trust owned main residence to be exempt from land tax in NSW.

    Not long after remarrying the husband died of a heart attack during a love making session. The terms of the trust allow the children to take full control of the trust and the property kicking out their father’s new wife.
     
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  2. HappyCamper

    HappyCamper Active Member

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    For the spousal transfers, can you elaborate on which states this applies to?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    All states allow stamp duty concessions for spousal transfers. Some only give concession for owner occupied properties, some only where there is no consideration.

    Off the top of my head Vic allow duty free transfers at full consideration for owner occupied or investment and from going from one name to another.

    NSW allows 1 name to 2 for the main residence. see
    Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW

    Tax Tip 50: Minimising duty on Spousal Transfers Tax Tip 50: Minimising duty on Spousal Transfers

    Legal Tip 95: Spousal Transfers and Some of the Legal Issues Legal Tip 95: Spousal Transfers and Some of the Legal Issues
     
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  4. ADLInvestor

    ADLInvestor Well-Known Member

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    If you already have 2 IP's, and they are in joint names, is it hard to move 1 of them solely to your name, and 1 solely to your wife's name? This would be for SA. Husband earns a decent chunk more than the wife, don't know if this matters?
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    @Terry_w - Where the spouses are TIC for the ppor and have other properties in individual names, do they have one land tax threshold or one threshold each?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    One spouse would buy out the other at full market value borrowing to do so. Need new loan approval, discharge of mortgage, contract of sale and transfers - best to use a lawyer to assist who can also give you tax advice.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes in NSW the owners are assessed as one, then they will be assessed separately for any properties they own individually with only their share of the joint property taken into account.
     
  8. ADLInvestor

    ADLInvestor Well-Known Member

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    Thanks for the information Terry, probably a bit too much to look into at this stage, especially with one currently fixed. Helpful as always!
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Future properties can always be purchased in single names. Many people out there have jointly owned properties already - in which case various costs will be incurred to move into single names. It may still be worth doing, you just have to add up the potential costs and then compare to the financial savings and non financial savings.
     
  10. lisawithane

    lisawithane Well-Known Member

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    particularly the last few recommendations once the hubby re-marrys and dies ;)
    Another factor I'm thinking of in my circumstances is hubby is 7yrs older therefore eligible to retire earlier, if some properties are in his name only he can sell in retirement, reduce CGT and pay down some of the other properties
     
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  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I thought of another reason today.

    Pre-payment of Interest


    One strategy to reduce tax is to prepay interest expenses on investment properties to bring forward any expenses into a year in which the income is higher than normal.

    Where all the properties are in both names and one spouse wants to increase deductions for whatever reason it will still be possible to prepay interest, but this will effect the other spouse.

    But where the ownership is separate one spouse can prepay their interest independantly of the other spouse.
     
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  12. Omnidragon

    Omnidragon Well-Known Member

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    Ex-colleague of mine only bought in his name. His land tax bill is nearly $100k a year.
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    He could have minimised this possibly.
     
  14. Omnidragon

    Omnidragon Well-Known Member

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    Yes he now knows. Although too late without incurring transaction costs.
     
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  15. Username86

    Username86 Well-Known Member

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    Thanks @Terry_w very interesting read, quick question if using cash for a deposit on a single name purchase does it matter if it comes from a joint name account with both incomes getting paid to that account or do you need to make sure the deposit is paid only by the person who is purchasing the property?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes it matters - as in there are different consequences.

    But this is a different topic.
     
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  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    By that I mean you have to consider
    - tax
    - family law
    - bankruptcy
    - succession on death

    Ideally you would keep finances separate and take this into account, but where the finances are combined and one spouse is buying a property the jointly owned cash can be used.

    The issue with tax is that 'they' are using cash to buy an investment which means less cash for the PPOR in the future.

    Family law - shows the non owner making a financial contribution.

    Bankruptcy - clawback provisions and allegations of resulting or constructive trusts

    Death - things will turn out differently if one dies.
     
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  18. jprops

    jprops Well-Known Member

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    RE: Spousal Transfers

    For the rentvestors who plan to buy a PPOR in 5 - 10 years. Could this be a strategy to release the equity for purchase of first PPOR without reducing deductible debt (by simply refinancing)?

    Also do you know if there are stamp duty concessions for investors in QLD with spousal transfers?
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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