With property prices still increasing and the urgency to buy ever-present, property co-ownership is a sensible option for anyone wanting to buy their first home or enter the market as an investor more quickly.
It allows you to purchase property with a partner, family member or even a friend.
But before you and your bestie decide to pool your money, be warned that while co-ownership has many advantages, it does come with some disadvantages, too. As this will be a legally binding arrangement, you need to be sure of your obligations and also commitment.
This article is intended to help anyone considering co-ownership along with the ins and outs associated with the process.
Property co-ownership is when two or more people share the ownership of a property. This is a common option if you’re buying a home as a couple, and it also makes homeownership a more affordable reality for singles.
To ensure joint ownership is right for you, you need to take into account risk vs reward.
Consider the following pros and cons:
When you enter into co-ownership of a property, you are entering a legal relationship. This is bound by a co-ownership agreement signed by you and your joint partners.
There are two main forms of co-ownership agreement: Tenancy in Common and Joint Tenancy.
Tenancy in Common allows two or more parties to have a financial share of a property and to transfer their interests independently. This offers a more flexible form of property co-ownership, allowing parties to own land in equal or unequal shares.
For example, three friends might buy a property with shares of 50%, 30%, and 20%. Unlike joint tenants, tenants in common do not have the right of survivorship, meaning each person can sell or transfer their share without needing approval from the others.
Tenancy in common therefore allows for independent control and transfer of shares. In the event of an owner’s death, their share can be inherited by their designated beneficiaries rather than transferring to the other co-owners.
Joint Tenancy is traditionally used by couples. These tenants own the entire interest in the property as a couple, not as individuals. This form of co-ownership has survivorship rights which means that if one tenant passes away, the surviving tenant assumes ownership of the entire property.
For example, if a married couple purchase a property as joint tenants, they both own 100% of the property together. In this case, if one of them passes away, the other will have automatic ownership of the property. However, if the couple divorces or one partner wants to leave, the joint tenancy can be converted into a tenancy in common.
So, joint tenancy is beneficial in that it provides survivorship rights which simplifies the transfer of ownership upon death, but it does not allow for individual control over the property share.
A co-ownership agreement is a written agreement that outlines the rights and legal obligations of each joint owner of a property.
The co-ownership agreement will cover who is entitled to reside at the property, who is responsible for mortgage payments and maintenance payments, and what happens in the event of death or bankruptcy.
If you are thinking about property co-ownership, it is important to seek professional legal advice to ensure all parties are on the same page and understand their mutual obligations. Without a co-ownership agreement, you risk becoming involved in costly legal fees to settle disputes.
When you sign a co-ownership agreement, you are acknowledging and agreeing to several key clauses, including:
Property co-ownership can impact taxes in different ways. If you go into joint ownership with someone, the main tax obligations affected include:
If you are Tenants in Common, each owner makes a capital gain or loss from the property’s eventual sale according to their interest in the property. The ATO treats joint tenants as Tenants in Common with equal shares in the property.
Similar rules apply to land tax as the ATO does to CGT. This means that regardless if you are Tenants in Common or Joint Tenants, you are considered joint owners and are both seen as the primary taxpayer.
However, where each party in the joint ownership owns property outside of the co-ownership, they will be considered the secondary taxpayer.
Each co-owner’s total land tax liability depends on their share of the property and any other properties they own. The rules and regulations for land tax can vary by state, affecting how joint ownership and extra properties are taxed.
If you are Tenants in Common, you must include the portion of the property’s income and expenses in your tax return according to your legal interest in the property.
For Joint Tenants, you must include half of the total income and expenses in your tax returns. The same applies to tax deductions.
You’ll want to make sure that you talk to a certified tax agent to better understand your tax obligations as a property co-owner.
Property co-ownership can offer several tax benefits, including:
In a co-ownership agreement, co-owners can divide property-related expenses, potentially lowering each co-owner’s taxable income.
Co-owners may claim depreciation deductions on the property’s assets, such as furniture and appliances. Each owner can claim a share of these deductions based on their ownership percentage.
If the property has been held for more than 12 months, each co-owner may qualify for a CGT discount when the property is sold. You and your co-partners may be exempt from CGT altogether if the property is used as the main residence and meets the criteria for the main residence exemption.
If you receive income from your property, then co-owners may be able to claim a tax reduction through negative gearing. If your property’s expenses exceed the rental income, you can claim a tax deduction for the loss. Each co-owner can deduct their share of the loss based on their ownership percentage.
Co-owners of a property can apply for a joint mortgage, allowing them to combine their incomes to qualify for a higher loan amount. Once a joint mortgage is approved, all co-owners will be on the mortgage and title deed.
Similarly, property conveyancing is a legal process of transferring ownership of property from one person to another. For those in a property co-ownership, the property is transferred to your name and the names of your co-owners. A professional property conveyer can carry out the conveyance of your property once contracts have been exchanged.
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To apply for a joint mortgage with your partner, start by assessing each other’s financial situation including credit scores, income, and debts.
Determine the total loan amount needed and choose a lender that offers joint mortgage options with favourable terms. You can then apply for pre-approval to gauge borrowing capacity. Documentation such as proof of income and credit reports will be required.
Once you submit the joint mortgage application, the lender will arrange a property appraisal. The lender will then review the application, verify details, and decide. If approved, the mortgage will be finalised by signing the agreement and completing the closing process to take ownership of the property.
If one party wants to exit the co-ownership, they have the following options:
It is essential to consult a legal professional to navigate these procedures properly.
When co-owning property, planning for estate and inheritance is crucial. Ensure your will clearly states how your share of the property should be managed after your death. Consider setting up a trust to have more control over the distribution of your share. It’s also wise to discuss your estate plans with your co-owners to prevent any potential disputes.
To keep your co-ownership arrangement effective, regularly review and update the agreement. Adjust it as needed for significant life changes or changes in your financial situation. Consulting a legal professional is recommended to ensure that updates are correctly executed and legally binding.
In a property co-ownership agreement, property responsibilities such as maintenance and expenses are divided between co-owners. To avoid any misunderstandings or disputes, it's essential to discuss and agree on who will handle various tasks.
If managing the property becomes too cumbersome, consider hiring a property management expert. These professionals can handle everything from tenant management and property maintenance, allowing you and your co-owners to focus on other aspects of property ownership.
For an expert property management advisor, reach out to the team at LJ Hooker.
Property co-ownership is a good option for some. Despite this, there are some legalities and risks you should be made aware of before going into joint ownership with someone. To help your property co-ownership process run smoothly, it’s best to talk to an expert.
The team at LJ Hooker is waiting to assist you. Voted Australia’s number one real estate brand, we make buying a home simple. Find an agent today.
If you have questions on finance, speak with the team at LJ Hooker Home Loans. They’re property finance specialists and offer free advice around financing your property purchase.
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