Tax Tip 276: Transferring title between spouses before a sale to save CGT?

In recent weeks I have had at least 3 people ask me if they can add a spouse to title before selling an investment property so that they can save CGT by having the capital gains split between 2 people.

It doesn’t work like this because transferring title to the spouse is itself a CGT event.


Example

Homer buys an investment property for $100,000 and wants to sell it now when it is worth $500,000. Homer approaches his tax lawyer and says he wants to add his wife Marge to the title.

On enquiry, it seems Homer thinks the $400,000 capital gain will be split equally between himself and his wife Marge so they each get taxed on $200,000 of the capital gain.

But this is not the case because

Homer is transferring $250,000 worth of the property to Marge. This will trigger CGT for Homer - a $200,000 capital gain.

If Marge and Homer then quickly sell the property they will have different CGT calcs each.

Marge will probably have no CGT payable as her share was acquired for $250,000 and she sells for $250,000. No gain so no tax. But there will probably be a loss as transferring will trigger duty and conveyancing costs too.

Homer will then be disposing of his 2nd half of the property so he will have a $400,000 gain on this.

Homer has not saved any tax. It has actually cost them money in wasted stamp duty, loan costs and gift fees.

There could be some slight tax savings in certain situations where the transfer between spouses happens in one year and the sale happens in the next year - see a future tip on this.

 

But Homer thinks he is smart. He has a potential buyer in sight, so sells half to Marge on 29th June. Then Homer and Marge sell to Mr Burns on 3rd July.

After possible stamp duty and two sets of legals, does Homer save much?

 

In NSW a spouse sale of their main residence from one owner to joint tenants or 50% each TIC can update the costbase for one party and lock in 50% of a exempt gain and also not result in stamp duty. This strategy works best immediately prior to moving to a new home as it may recycle debt and allow a higher neg gearing benefit overall. But only for one party !! The existing owners tax position wont change.

It used to work in Victoria too but isnt now permitted.

But it does come with catches like the need to refinance and lenders agreeing to refinance this.
And legal costs. But with the present offer by many banks to pay $4k to refinance this could even be a tax free money maker overall.

 

Here is that tip:
Tax Tip 278: Spousal Sale to push CGT over 2 Financial Years? Tax Tip 278: Spousal Sale to push CGT over 2 Financial Years?