Ownership structures are an important consideration for those seeking to create wealth through property investment.
When you established whose name would be on the title of your first home, chances are you didn’t put a lot of thought into how that decision would impact your property ownership journey down the track.
The good news is that ownership can be changed to better reflect your needs and circumstances at various times.
And in fact, such amendments can be highly beneficial when approached in the correct manner and executed for the right reasons.
In this article, we speak with Mandi Morrison from Sargeants Port Philip Conveyancing about those situations where it makes sense to transfer ownership of a property to a relative, such as a spouse or de facto and importantly, what the implications might be for taking this step.
What is a related party transfer?
“A related party transfer,” as Mandy explains, “is any property transfer between human beings that are in a relationship, such as spouses, parents of children and siblings. This also includes deceased estates – when you’re moving assets in and out of family trusts and superannuation funds. So any related entity.”
For the sake of simplicity, we will narrow our definition here to spousal transfers, and explore the ins, outs and implications of transferring ownership of your own home to your life partner.
The reasons for a related party transfer
Mandi says the decision to change official title ownership for a property usually comes down to one of two reasons, being asset protection or taxation implications.
Asset protection becomes a defining factor with regard to official ownership of real estate when, for instance, one party is in a highly litigious industry (think medicine as a good example), or is about to commence a new business venture that could place their own personal assets in jeopardy should someone decide to sue them.
Obviously this is an important consideration and one that drives many people to carefully contemplate and in many instances, execute a transfer of ownership in order to cover their bases and protect their family’s most valuable asset.
“On the topic of tax effectiveness,” says Mandy, “let’s say you want to move out of your family home to upgrade, but still retain the old home as a rental property.
“It may not be tax effective if you have an existing mortgage, because if you refinance the mortgage over the old property without changing ownership, the new borrowings are not tax deductible,” she explains.
“This means you might be positively geared and end up paying tax on the income. So one of the things we specialise in is selling to one of the spouses to increase the tax deductibility of the asset and then using the extra borrowings to finance the acquisition of the new property.”
This type of restructuring can generate massive financial benefits, as it essentially sees the sale of an asset from one party to another in order to create a fully tax deductible debt on the old property, whilst reducing the mortgage over your new home.
The spousal stamp duty exception
While many property owners believe that transferring a title from one entity to another will attract stamp duty fees, this is actually not the case when that entity happens to be your life partner.
Mandi explains, “This kind of exemption doesn’t apply to all relatives, just to spouse and domestic spouses or de facto partners. So we want to make sure there’s no stamp duty and we will apply for an exemption on that basis.”
She warns however, that this doesn’t mean the entire transfer process is free from costs, with charges to make the relevant changes potentially adding up to around $2000 by the time land title office, bank and conveyancing fees are accounted for.
“But when you consider a cost of $2000 compared to the tax deductibility benefits over the long term and even the potential costs of selling the asset instead of retaining it under different ownership, it can certainly be money well spent,” says Mandi.
The one proviso that people need to be aware of is in transferring ownership of an investment property, in which case you would be obligated to pay capital gains tax on the “sale” of the asset in question.
Overall though, as a homeowner looking to profit from your first foray into the world of property, related party transfers can have numerous benefits. This is most definitely a discussion we have with our clients here at Intuitive, because ultimately, we believe in making real estate work for you.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.