The Ultimate Guide on Joint Property Ownership in Australiaamir@propertytaxspecialists.com.au
With property market prices rising, it’s becoming more and more common for people to invest through a joint property ownership structure.
Joint property ownership can be a fantastic way to save on taxes and boost your wealth when done correctly, but you need to know what you’re doing!
This guide will discuss all types of joint property ownership, how joint property ownership works in Australia, and the pros and cons associated with joint property ownership.
What Is Joint Property Ownership Australia?
Joint property ownership is a common practice in Australia where more than one person shares in purchasing the property.
Rising property prices in Australia have made it difficult to own property, be it in an owner-occupier capacity or as an investor. So, by pooling your money together and combining your borrowing power, property co-ownership significantly reduces costs and makes it attainable for the average Australian to climb the property ladder.
There are two primary forms of property co-ownership in Australia:
- tenancy in common, and
- joint tenancy
How you structure your joint property agreement can have significant impacts on your tax obligations and asset distribution.
Tenancy In Common
Tenancy in common involves owning property in a way that allows for unique division rules and lower taxes.
If you decide to set up your joint ownership as a tenancy in a common structure, you’ll have a defined share of the property, and you’ll be able to transfer your interests independently.
This means that the co-owners agreement can specify equal or unequal shares in the property co-ownership and that those shares can be distributed to any beneficiary upon your death.
However, in terms of Australian property law, when it comes to the use and enjoyment of the property, each joint property owner doesn’t have a distinct physical share of the property.
Tenancy In Common Example:
Lucy and Melanie purchased a $320,000 property investment together.
Lucy was able to pay $240,000 towards the purchase price, and Melanie could contribute $80,000. So, they had a lawyer draw up a tenancy in common agreement in which Lucy owned 75% of the investment property, and Melanie owned 25%.
Although Lucy paid more towards the property price and has a bigger share in the profits drawn from the property, they both share an equal right to use and enjoy the entire home.
So, if they were to eventually change its use to be a holiday home and not an investment property, they could visit the property on equal terms.
Joint Tenancy Property Ownership
Joint tenancy is a type of joint property ownership that allows for equal ownership and interest in the property.
This means that they own the interest in the property together and don’t have an individual interest in the property.
The biggest difference between joint tenancy and tenants in common is that a right of survivorship exists between joint tenants. In other words, when one of the co-owners passes away, their interest in the co-owned property automatically passes to the surviving joint tenant.
The most common application of joint tenancy is when a married couple has a co-ownership agreement.
Joint Tenants Example:
David and Kayla purchased their first property together once they got married. The cost of the property was $415,000.
Kayla was able to pay $360,000 towards the purchase price, and David could contribute $55,000. However, they have an equal interest in the property because they entered into a joint tenant agreement.
And if Kayla were to pass away before David, he would gain the full interest in the property, and it won’t form part of Kayla’s estate to distribute to beneficiaries.
How Does Joint Property Ownership Impact Tax Obligations?
Joint ownership of property can impact different taxes in different ways.
Capital Gains Tax (CGT)
According to the Australian Tax Office (ATO), if you jointly own property with someone, you need to establish each owner’s share or interest in it for capital gains tax purposes.
With the tenants in common, it’s simple: each owner makes a capital gain or capital loss from the property’s eventual sale according to their interest in the property.
So, Lucy and Melanie, in the example above, will split the capital gain or loss according to their 75/25 interest in the property.
And for the purposes of CGT, the ATO treats joint tenants as tenants in common with equal shares in the property.
So, David and Kayla turned their property into an investment property, they would split the capital gain or loss equally if they ended up selling. If Kayla dies, David would assume the entire capital gains tax obligation on the property’s eventual sale.
Each State and Territory applies similar rules as the ATO does to capital gains tax. This means that regardless of whether you’re a tenant in common or a joint tenant, you’re considered joint owners and are known together as the primary taxpayer.
This means that they are considered a single owner.
However, where each party to the joint ownership owns property outside of the co-ownership, they’ll be considered the secondary taxpayer. So, their interest in the jointly owned property will be considered together with any other property they own.
According to the Australian Taxation Office, rental income and expenses, for income tax purposes, must be allocated according to their legal interest in the property.
Joint tenants must include half of the total income and expenses in their tax returns. The same applies to tax deductions. Each joint owner can only claim 50% of the total property tax deductions.
On the other hand, tenants in common must include the portion of the property’s income and expenses in their tax return according to their legal interest in the property.
So, Lucy would declare 75% of the income expenses and claim 75% of the tax deductions. Melanie will declare the remaining 25% and claim the remaining 25% in deductions.
There are two types of joint property ownership structures, and each structure impacts how the assets can be distributed and how the tax obligations are shared:
- Tenants in common share interest in the property according to their legal agreement – it doesn’t have to be equal shares – and their interest gets distributed according to their will.
- Joint tenants share an equal interest in the property, and the surviving joint tenant assumes a full interest in the property should the other co-owner die.
There are also significant tax differences between joint tenancy and tenants in common arrangements.
So, if you’re thinking of going down the joint property ownership route, you’ll need to consult a financial advisor to see which ownership structure best suits your financial circumstances and goals.
You’ll also want to make sure to speak to a certified tax agent to ensure that you’re distributing your tax obligations according to ATO compliance rules.
At Property Tax Specialists, we have decades of experience navigating the joint property ownership rules inside and out, so you don’t have to. We make sure your investment property portfolio complies with regulations and meets the necessary tax reporting obligations.
To discuss any matter relating to joint property ownership or to arrange your affairs for asset protection and minimum tax, get in touch today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.