Joint Ownership Of A Property
Normally, a family will buy a rental property in the name of the person who earns the most income. Why?
They believe that the initial rental losses that can occur when negatively gearing a property are best allocated to those in the higher tax rates who can save the most tax.
What people do not consider is what happens later on – when the property is sold. This can trigger a huge capital gains tax liability for those already on high rates.
Do you have different incomes?
These days most families have two income earners and many are deciding to “hedge their bets” by owning the property in equal shares.
Most friends that buy properties together are in different financial situations and own the property together to capitalise on each of their strengths. For example, one may have a sizeable deposit while the other may have a strong enough income to afford the repayments.
During the period of ownership half the rental losses go to each of the owners and when the property is sold the capital gain is also split.
Although the year on year tax saving is slightly reduced, the overall tax over time is generally less than if only one person held the property. This reduces the overall tax risk of owning the property.
Beware of possible complications!
Owning joint property can cause its own complications though. Normally the loan, income and expenses of the investors are all split 50/50 for tax purposes notwithstanding who actually paid for it.
If the investment property is co-owned with someone other than your spouse then there can be disagreements about when to sell as each party may have different tax profiles at the time.
Before buying an investment property make sure that you all have clearly defined investment goals that align with each other. Also decide what you will do if one person wants to sell and the other does not.
It is common for friends who buy real estate together to have a disagreement when one needs the equity for something else and the other is forced to buy them out or sell the property as a result.
Having a clear exit strategy up front prevents these disagreements from causing a breakdown in your friendship.
How do the banks assess joint mortgages?
If you buy a property with another person then the banks will assess your investment home loan slightly differently:
- One person having a high income will make up for the other not being able to afford their share of the repayments.
- One person having a good credit history will not compensate for the other having poor credit, unless their income is not required to prove that you can afford the debt.
- Credit scoring will normally be slightly more favourable than for a single applicant.
- The asset position of each borrower is assessed differently depending on the lender you apply with.
Aside from the points listed above you will be need to provide the standard documentation as if you were applying for a mortgage to buy a property on your own.
Buying your next property on your own
If you and a friend own a property worth $500,000 with a loan of $400,000 on it, then how will the banks assess your situation if you then decide to buy another property on your own?
If the repayments for the loan with your friend were $3,000 / months and the rent income was $2,000 / month then surely the bank would use half of these figures in their assessment for your new loan? Unfortunately this is not the case.
Banks assume the worst, and so will assess your loan as if you are making the full $3,000 / month in repayments however they will only accept half of the rent income!
Thankfully not all banks have this policy! Two of our lenders can consider your actual share of the repayments and rent and as a result will assess your new home loan less conservatively. Please call us on 1300 889 743 or enquire online and one of our mortgage brokers will call you to see if you qualify under this policy.
Speak to an accountant
This information is general and has been provided by Lucentor Pty Ltd who are accountants that specialise in tax for property investors.
We recommend investors obtain financial advice specific to their situation before making any investment or decision regarding their finances.