Buying a property is exciting but when you are buying with another person, there are some important things to consider that can impact your estate planning and investment strategy.
1. The difference between joint tenants vs tenants in common
There are 2 types of of ownership when buying a property with another person: joint tenancy and tenancy in common.
When you own property as a joint tenant, you own the whole of the property together with the other joint tenant and a right of survivor-ship applies. This means that when a joint tenant dies, the property automatically passes to the surviving joint tenant and the property does not form part of the deceased’s estate. This is a common form of ownership between spouses.
When you own property as a tenant in common, it means you own defined shares in the property which can be equal or unequal. The shares of a tenant in common can be dealt with separately. There is no right of survivor-ship, meaning the shares can form part of the deceased’s estate and will pass according to the owner’s will or succession laws. This is a common form of ownership for investors.
2. Investors should get tax advice about the ownership percentages
Investors buying property together should get tax advice before they sign a contract. Often one of the investors has contributed more than the other or has a higher taxable income and may want to benefit from taxable deductions associated with the investment property. In these cases, it may be beneficial for the investors to own the property as tenants in common in unequal shares. For example a higher income earner may be advised to own 99% of the shares and the other owner 1% of the shares for a negatively geared investment property. The ownership percentage may be different for positively geared properties. Property investors should speak to their accountant or finacial advisor to get advice relevant to their particular situation.
3. Getting it wrong can be costly
If you don’t get tax advice and later realise you need to change the ownership percentage between co-owners on title, it can be a costly mistake to fix.
Transfer duty (aka stamp duty) is usually charged on the transfer of any interest in the property between co-owners. For example, if investor co-owners purchased the property as tenants in common in equal shares and later realised they should have purchased in unequal shares of 99% and 1%, then they will need to transfer 49% of the property to the other co-owner and transfer duty will be charged and calculated based on 49% of the value of the property.
4. Foreign co-owners
Foreign buyers usually need to apply for Foreign Investment Review Board (FIRB) approval to buy property in Australia and in NSW, VIC, QLD and WA, they will also usually be charged foreign surcharge duty (up to 8% extra).
If foreign buyers are intending to purchase property with their Australian spouse, then they may be able to structure their purchase to obtain a more favourable outcome.
Foreign persons do not need to apply for FIRB approval (and would save at least $5700 in FIRB application fees) if they purchase a residential property as a joint tenant with a spouse who is an Australian or New Zealand citizen or who has permanent residency. This exemption does not apply if they purchase the property as a tenant in common. Even as joint tenants, however, foreign surcharge duty would be payable on the foreign person’s interest in the property (i.e. 50%).
If a foreign person purchased a property as a tenant in common in equal or unequal shares then they would need to apply for FIRB approval (which would only usually be approved for new residential properties) but would only pay the foreign surcharge duty on their share of the property (which could be as little as 1%).
Another alternative to reduce the acquisition costs is for the non-foreign person to be the only owner on the property title and for an interest in the property to be transferred at a later date to the foreign person once they became a permanent resident. Such a transfer may also be exempt for transfer duty in most states if the transfer was for a principal place of residence and the transfer results in the co-owner spouses holding the property in equal shares.
5. Co-owners agreement
Co-owners should consider and document what they want to happen in the event of a dispute about the property; for example if one of the co-owners wants to sell, and the other doesn’t. There are some laws dealing with this type of situation but it can be costly to appoint a statutory trustee for sale. Co-owners should consider entering into a co-owners agreement which is a legal document setting out the rights and obligations of each person (other than in the event of a marriage or de facto relationship breakdown for which a binding financial agreement would be required) . This should be signed at the start of the ownership whilst the co-owners are friends and not left until there is a dispute which will be too late.