Sydney mortgages are among the most expensive in the world, with the general requirement of 2.04 average full time salaries needed to service a standard mortgage on a median priced detached house.
So when it comes to buying a home, you may think “the more, the merrier.” But is it…?
While buying a house with friends or relatives is a common practice to capitalise on an investment property, it comes with its own issues.
Understanding the tax issues with buying a home
Capital Gains Tax
Capital Gains Tax (CGT) first came into effect on 20 September, 1985. So, unless the asset was acquired before that date, the tax applies to any change of ownership. Therefore, your exposure to CGT depends on how you own a property. If you jointly own an investment property, you need to know the following:
- Tenants in common: Any CGT exposure is in line with your ownership interest – this might be 50/50 or some other configuration.
- Joint tenants: Each owner is treated as holding an equal interest in the property for CGT purposes.
Tax return from expenses and income
This also depends on how the property is owned. For example, if you and another family member/friend own a property 50-50%, then all expenses, income and tax returns will be split in half between the two of you.
However, there are a few exceptions:
- You carry on a rental property business: You will need a partnership agreement to determine how the income and expenses are split. This applies when you own more rental properties and you manage them in a business-like manner.
- If one owner borrowed money to acquire their interest in the property, they can claim a deduction for their own interest expenses. In this case, these expenses do not need to be split with the other owner(s) who may have used their own financial savings to acquire the property.
You might also be interested in: Your Tax Return
What if it all goes haywire?
Disputes and fights are common among friends and family members.
Take into account that even though it is not the case now, disputes may arise with your joint property. The most common disputes are triggered by some form of action that one party wants to take and the other doesn’t. For example, one party might want to sell or renovate the property, while the other party might oppose.
If the problems cannot be solved amicably, the issue can be taken to court. State laws allow for one party to make an application to the Supreme Court for the sale or partition of the property. Following an application under the partition laws of each State and Territory, a court may make an order for partition or sale of the property.
That’s why it’s important to have a legal agreement
If you decide to buy a co-owned property, it is recommended to have a Co-owners Agreement. It can include the terms of ownership, which can save you and your dear ones a lot of headaches. You can include:
- Ways to resolve disputes;
- What share each party owns;
- When you can sell;
- Who pays the bills;
- What happens if a party dies;
- What happens if a party becomes bankrupt;
- When you can exit the agreement; and
- When you can buy the other party out.
[ctt template=”9″ link=”atyb3″ via=”no” ]If you decide to buy a co-owned property, it is recommended to have a Co-owners Agreement. [/ctt]
Are you thinking about buying a co-owned property?
If you want to invest in a co-owned property with friends, relatives or business partners, our specialists are ready to assist you with drafting a Co-owners Agreement and explain the tax implications.