It’s not uncommon for friends and relatives to band together to capitalise on the investment property market. But what happens when it all goes wrong?
The Housing Industry Association shows that it now takes 2.04 average full time salaries to comfortably service a standard mortgage on a median priced detached house in Sydney. So why not pool your assets?
The tax issues
Capital Gains Tax applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 when the CGT rules first came into effect.
In general, if you jointly own an investment property, your individual exposure to CGT will depend 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.
Like CGT, how the expenses and income from the investment property is represented in your tax return also depends 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 main exceptions to this are where you are carrying on a rental property business (e.g., you own a significant number of rental properties and manage this in a business-like manner) in which case a partnership agreement will generally determine how the income and expenses are split or where one owner has borrowed money to acquire their interest in the property in which case they can claim a deduction for their own interest expenses (these do not need to be split with other owners who may have used their own savings to acquire the property).
The legal issues
Disputes between friends and relatives can occur very easily. One area that often triggers a dispute is when one party wants to take some form of action and the other doesn’t – like selling the property or investing in expensive renovations. If the problem 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.
If you are considering buying property with friends, relatives or other investors, we can help you with a Co-owners Agreement and the tax implications.