Tax Tip 355: CGT with Jointly Owned Property

When 2 or more people own a property together, they are considered to each hold separate interests in the property for tax law purposes. So, the property itself is not the CGT asset, but the person’s share of the property is the CGT asset. This is based on legal ownership – usually.


Some confuse this and think spouse A can transfer their share to Spouse B who can then sell the property and wear the tax. Not so as the transfer between spouses is also CGT event, even if there is no ‘sale’.


Example

Homer and Marge hold a property with pregnant with a $100k capital gain. Marge isn’t working and Homer is on the top tax rate. Homer suggests they make Marge the sole owner so she will be taxed on the full capital gain, and he won’t pay any tax when the property is subsequently sold.

But they learn that this is not the case.

When Homer transfers his share to Marge it will trigger CGT for him.

When Marge then sells the property, she will pay CGT on the whole property, and this will be worked out differently on the 50% she owned from the beginning and the 50% she bought from Homer.


Example 2

Homer and Marge own an investment property worth $500,000 which they later sell for $600,000.

They own it as tenants in common in the shares 40/60 with 40% being Homer’s share and 60% Marge’s share.

They will each have to work out their own cost base and gain with Homer basically having a gain of $40,000 and Marge $60,000.



If joint owners are holding the property as Joint Tenants, then they would be considered to be owners in equal shares.


Example 3

Homer, Marge and Bart own an investment property as Joint Tenants. They will have 1/3 of the property each for CGT purposes.


Taking this a step further, if one joint owner dies and their share of the property ends up being held by the survivor, the survivor will have 2 separate interests in the property, with potential different cost bases.



A jointly owned property could be CGT exempt for one person but not for another owner.


Example 4

Homer and Bart own a property as tenants in common with Bart renting Homer’s share of the property and living there and Homer living in his other property. If they sold the property Bart’s share could be sold CGT free, but Homer would be taxed on this share.

 

This also extends to Partnerships. A partnership ie a JV arrangement, cannot own a CGT asset. It is not a legal entity or "person". The persons which own the land remain owners distinctly from the income produced from USE of the land. Income from use of the land is passive and considered a "rent" and tax issues may consider the bonafide nature of this arrangement. The land owner may use their land in a JV but it is not a JV asset to dispose of. Tax law does not recognise spouse partnerships in many instances. eg The Simpsons cant create a partnership for rental income.

Likewise a entity cannot claim deductions for USE of anothers land unless it has leased the land and has a lawful basis for incurring costs in production of assessable income.