Setting up the correct property ownership structure – whether investment or owner occupied – held in partnership with a spouse or defacto can have a dramatic impact on cash flow, net wealth and the ability to invest further.
The way couples structure joint property ownership can have huge implications on payable tax, cash flow and future borrowing capacity, according to inSynergy Managing Director, Richard Sheppard.
“As a couple, you have a choice in how you set that ownership structure. It doesn’t need to be 50-50, you could do it 75-25, 90-10 or even have the property only in one person’s name,” he says.
“The tax benefits or costs are determined by that ownership structure, not the lending structure. That is, whoever is listed as the owner or part owner of the property.”
Considerations should be given to income tax, land tax and capital gains tax when considering property ownership structure in couples.
If the couple are on similar income Richard generally advises clients to set an equally shared ownership structure, although states that NSW is an exception due to land tax – see below.
“When you come to sell, the joint ownership will spread the capital gains and land tax across two incomes. You get half the profit in each person’s name which ultimately reduces tax,” he says.
However, when one partner earns more than the other, Richard suggests it is generally wiser to structure ownership so more of the property is in the name of the partner with greater taxable income, to increase negative gearing tax offsets.
“The flipside is that you might pay more capital gains tax when you sell but we usually want to set up the investment to be more resilient. For example, if interest rates go up, the tax offsets will increase,” he says.
“It’s better for cash flow and better for risk management. Own more property sooner and achieve more capital growth which counters any potential downside of higher capital gains later.”
He encourages investors to monitor and manage changes in income levels and to adjust the loan structure or repayments to capitalise on tax benefits.
Land Tax Considerations:
All states and territories charge land tax which comes into effect only once a property investment portfolio reaches a certain value. Once that threshold is reached land tax will be charged.
And in all states and territories – except for NSW – only the portion of a property you own contributes towards your individual land-tax-free threshold.
However in NSW, if you are joint owner of a property, the whole value – even your partner’s share – contributes to your land-tax-free threshold.
“Essentially you are only getting half the land-tax-free threshold, or paying twice the land tax,” Richard says.
“In NSW we normally advise people to have separate property ownership of two properties – depending on income tax and capital gains tax implications, so you each receive a land-tax-free threshold.”
And when it does come time to sell, Richard says if you have multiple properties you can choose to sell the one which will least impact on any payable tax.
Future borrowing capacity and cash flow are also improved through appropriate ownership structures that improve tax benefits, according to Richard.
“Most lenders will take negative gearing into account and apply it against the income of whoever owns the property,” he says.
“So the correct ownership structure leads to better tax benefits, better cash flow and better borrowing capacity. This in turn reduces risk by allowing larger buffers and creates the opportunity for improved future capital growth.
Owner occupied structure:
Even when buying an owner occupied property, Richard encourages couples to think whether it will always be owner occupied or if it might one day become an investment.
“You generally can’t retire on one property and you want to structure and plan your property investment around a long term strategy.”
He encourages people to obtain advice rather than navigate complex financial systems on their own.
“Good advice from a property investment advisor or accountant can avoid an inefficient loan structure and save you thousands of dollars every year.”
Important Note and Warning: This information is general in nature and should not be considered advice. We highly recommend you discuss these concepts with your accountant, lawyer, property investment adviser and investment finance mortgage broker jointly to ensure any considered concepts are suitable for your personal financial situation, as one effect of the concept may negatively impact another part of your plan.