Most investors tend to own property in their personal names. Regarding alternatives to personal name ownership, I have previously explained why I generally avoid using family trusts to own property – primarily due to higher land tax rates and the likelihood of not immediately benefiting from negative gearing. Additionally, last month, I discussed the potential advantages of using a non-trading investment company to hold property.
In this blog, I want to discuss owning property in personal names and outline the key factors we consider when determining personal ownership structures for our clients.
Three options to consider
When owning property in personal names you have three options to consider if you have a spouse or you are investing with other people:
- Joint ownership: All parties are listed on the title, and ownership is assumed to be equal, with no specified percentage.
- Sole ownership: One person solely owns the property.
- Tenants-in-common (TIC): This structure allows owners to assign specific ownership percentages, such as one person owning 1% and the other 99%.
Main benefits of sole name
Of course, if you don’t have a spouse or are not co-investing with others, sole ownership is your only option.
However, if you do have a spouse, there are potential advantages to one spouse having sole ownership of an investment property, including:
- Tax savings through negative gearing: If one spouse has a significantly higher taxable income and the property is fully geared, it might be more tax-efficient for that person to own the property. For example, someone with a taxable income over $190,000 can save 47% of the property’s income loss in tax savings.
- Land tax: Each state has a land tax-free threshold for individual owners. For instance, in NSW, each person can own up to $1.075 million worth of land before being subject to land tax. This means that each spouse can individually own $1.075 million in land, totalling $2.15 million, and avoid land tax. However, joint ownership in NSW only qualifies for one land tax-free threshold, resulting in an annual land tax liability of $17,300 on $2.15 million of join landholdings. Therefore, in some states, sole ownership can help minimise land tax liabilities.
Main benefits of joint ownership
When property is owned jointly and one of the owners passes away, the property automatically transfers to the surviving joint owners. This can be advantageous for estate planning, as it keeps the asset out of the deceased’s estate. For example, if a spouse anticipates their estate being challenged, they might choose to own property jointly with their spouse. Upon their death, the property will be fully owned by the surviving spouse and will never form part of the departed’s estate.
Another advantage of joint ownership is that any capital gain from the sale of the property is shared between the two owners, which reduces tax liability since tax is applied at marginal rates. For instance, if you make a gross capital gain of less than $1 million, spreading the gain between two taxpayers can result in a tax saving of up to approximately $34,000. The savings cap out at around $34,000 i.e., any gain greater than $1 million does not save any more money. Therefore, for very large capital gains of several millions of dollars, the tax savings might only be 1%-3%, so in those cases, we generally prioritise other factors like maximising negative gearing over minimising CGT.
Main benefits of tenants-in-common
A TIC structure can be useful for asset protection. For example, if you are co-investing with family or friends and want your share of the property to be included in your estate if you pass away, owning the property as TIC ensures that your share is part of your estate.
Also, we often recommend that spouses own property as TIC, with the lower-income spouse owning 1% and the higher-income spouse owning 99%, to maximise negative gearing. This structure provides asset protection because both spouses are on title. In the event of a relationship breakdown, no one spouse can unilaterally make decisions about the property, including selling it. With both parties on the title, each has control over the property. This can be a double-edged sword, as it also means that a spouse could potentially delay or complicate a sales process.
A TIC structure can also be advantageous for investors with significant cash savings in an offset account or those planning to accumulate a lot of cash. In such cases, we may arrange separate loans for each owner and offset the lower-income spouse’s share. For example, if a client has $300,000 in cash savings and purchases a $1 million investment property, we might recommend the low-income spouse own 30% of the property and the high-income earner own 70%. We would then arrange a $300,000 loan for the low-income spouse’s share and place all cash savings in a linked offset, effectively making their portion of the property un-geared. Meanwhile, the higher-income spouse would borrow $700,000. In this scenario, 30% of the property’s income is attributed to the low-income earner, and if they had no other taxable income, they might not incur any tax on this income. The higher-income earner receives 70% of the income but 100% of the family’s interest expense deduction, as the $700,000 loan is not offset. Over time, as the property’s cash flow improves or the spouses’ tax situations change, the low-income earner could move some of the offset cash into superannuation for example. Or we could move some of the offset monies to offset the $700,000 loan, depending on what achieves the best tax outcomes.
What about your family home – does that matter?
When deciding how to own your family home, negative gearing and CGT often do not apply, so the decision is usually simpler.
However, the two main considerations tend to be asset protection and future tax outcomes.
If one spouse is at risk of personal liability, it’s often best for the property to be owned mainly by the other spouse, perhaps with a 99/1 TIC structure. That said, I believe asset protection risks are often overstated, as the right business structures and insurance typically mitigate all material risks.
Another consideration is whether the home might eventually be converted into an investment property. If this is a possibility, you will need to factor in potential negative gearing and CGT implications, as discussed above.
Choose wisely – you get one shot at it!
No ownership structure will perfectly suit all current and future tax outcomes. People’s circumstances often change over time, and these changes are not always predictable. However, it’s important to consider long-term implications – what works for your current situation, as well as how the structure might be affected by future changes.
Typically, changing an ownership structure after purchasing a property tends to be cost-prohibitive, as it often triggers stamp duty and CGT, so it’s best to think about this matter carefully.
