It’s becoming quite common in the current property market for friends and family to band together to get a foot in the property market. There can be many benefits of pooling assets, particularly in the initial stages however what will happen years down the track if something goes wrong?
Capital Gains Tax (CGT) applies to the transfer of any asset purchased after 20 September 1985 provided it falls under the category of a CGT asset.
If you are an owner of a jointly owned investment property, the exposure you have to CGT depends on how the property is owned. If the property is held as tenants in common then any CGT exposure is in line with your ownership interest – this might be 50/50 or some other configuration. If the property is owned as joint tenants then each owner is treated as holding an equal interest in the property for CGT purposes.
From an Income Tax perspective, Income derived from the rental property and the expenses associated are required to be split based on how the property is held. For example, if you and a family member each own a 50% interest in the property you will need to split the rental income and expenses 50/50 when preparing your tax returns.
The one big exception to splitting income based on ownership is when you and your partners own multiple properties in a business-like manner. In this scenario, a partnership agreement or trust deed (if applicable) will generally determine how the income and expenses are split.
An area of joint property ownership which can easily lead to disagreements is whether to sell a property. If the issue cannot be resolved, the issue may be taken to court to force a resolution.
State laws allow for one party (a co-owner) 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.
This is where a legal agreement, a Co-owners Agreement, to underpin the terms of ownership can really help – even for the best of friends or the closest of relatives. Legal issues covered include:
• Ways to resolve disputes;
• What share each party owns;
• When you can sell;
• Who pays the bills;
• What happens when 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.