Tenants in common question

[omni]

Suppose a house is purchase tenants in common 99 vs 1 for husband and wife. Initially house is leased out at market rent and is considered an IP.

After 3 years, husband and wife move into the house and use it as a PPOR. At that point, convert ownership of the house into tenants in common 50 vs 50 ownership. Is this dutiable in NSW? If so, what if it was made joint tenants instead.

3 years later (total 6 years of ownership), house is sold for CGT. Is the house exempt for CGT? What proportion of it is attributable to husband, and what portion to wife? Is it 50 vs 50, or 99 vs 1?

 

[D.T.]

You need to get it valued when it changes from IP to PPOR as CGT calcs will use that value.

In NSW changing title isnt dutiable according to http://rgdirections.lpi.nsw.gov.au/...nts/transfers/transfer_severing_joint_tenancy

 

[jrc]

There will be a CGT event when the husband transfers 49 per cent to the wife, so CGT would be payable then on that 49 per cent

 

[Terry_w]

Suppose a house is purchase tenants in common 99 vs 1 for husband and wife. Initially house is leased out at market rent and is considered an IP.

After 3 years, husband and wife move into the house and use it as a PPOR. At that point, convert ownership of the house into tenants in common 50 vs 50 ownership. Is this dutiable in NSW? If so, what if it was made joint tenants instead.

3 years later (total 6 years of ownership), house is sold for CGT. Is the house exempt for CGT? What proportion of it is attributable to husband, and what portion to wife? Is it 50 vs 50, or 99 vs 1?

Generally nominal duty - if no consideration. But this may effect the deductibilty of interest later if rented again.

As JRC mentioned transfer will be a CGT event. So there will be 2 distinct interest in the property - the 1% portion and then the 49% portion (for the transferee)

 

[GaryT]

Welcome to the fun and complexities to the CGT rules.

Basically you need to break down and separate each transaction.

On changing from an IP to a PPOR you effectively sold 49% from husband to wife. As the property is an IP up to that point this is a fully taxed CGT event. So the capital gain to the husband only at that point in time in simple terms is 49% of the sale proceeds (or the deemed market value) less the purchase costs.

At this point the cost price for the wife becomes the 49% amount above plus the 1% of the initial purchase costs, although this will be somewhat irrelevant if the property is kept only as a PPOR going forward as there will be no further CGT on the 49% just acquired.

When the property is subsequent sold 3 years later, 51% of the property will be subject to CGT on a proportional basis. i.e. the 49% acquired by the wife has been used only as a PPOR, so she is only liable for the 1% of the gain from original purchase to sale on a proportional basis (i.e. 3/6). The husband is liable for the 50% of the gain from original purchase to sale on a proportional basis.

Even trickier is calculating the cost base.

 

[Paul@PFI]

One of the merits of the NSW Land Tax Unit Trust strategy is it gives fixed entitlements but this can be changed without any significant legal impediments or costs.
- Subject to "No duty if property value is under $2m"
- Change ownership % and no title issues...Add, remove "owners"
- Same NSW land tax outcomes as personal ownership (except no PPOR exemption)
- Gives certainty with fixed rights to income and capital if a reliable deed is used..Warning. Not all fixed trusts are fixed trusts !
- refresh refinancing and use proceeds for non-deductible asset acquisition. ie Dad can sell down his interest and Mum can increase hers and gear it. dad uses the $$$ from redemption of units to payoff the family home. Tax deductible. (Conditions apply)
- Introduce a SMSF in future provided ip isnt used as loan security

The CGT issue remains even with a NSWLTUT. Changes to unit holdings must always be based on market valuation of the trust. There can be some timing strategies around this. However, in these instances typical CGT at a max 23% of the profit is not usually an impedement. $40K duty + 23% CGT is.

The problem with the three contract options shown on the front of the std contract form is they are all fixed. I have yet to meet a client that wants be set in stone for 5, 10, 20+ years. "***** happens"...Things change. The major problem with TIC on 99/1% is -gd prop becomes +gd and/or incomes change. Tax planning then fails big time. Good and bad fortune. Its good to be able to re-engineer ownership without high costs.

In the example cited it may be possible to achieve a final duty free sale to a arms length buyer. Split the duty savings 50:50 perhaps ??