When purchasing an investment property as a couple, it’s easy to assume that the purchase should be in joint names. However, this decision can significantly impact your tax situation in the short and long-term. While every case is different, every investor should be aware of the key tax considerations when determining whose name to purchase the property in.
Tax Deductions on Interest and Expenses
If you own the property in your name, you're eligible for tax deductions on interest paid for the mortgage, property maintenance, and other expenses. Similarly, if the property is owned jointly, these tax deductions are shared according to the ownership. These tax deductions can reduce your tax liabilities and improve the overall return on your investment.
Given that most properties are negatively geared, at least in the first few years after the purchase, there are often significant tax savings that can be achieved. Generally, owning the property in the name of the higher income earner is beneficial as they may be on a higher tax bracket.
For example, if one member of a couple earns $80,000 per year and the other earns $150,000 per year, their marginal tax rates are 30% and 37% respectively (not including the Medicare Levy). Owning the property in the name of the higher earner means that tax deductions can be claimed at the rate of 37%, achieving a 7% greater tax saving than if the tax deduction were claimed by the lower earner.
However, the inverse may apply if the property is positively geared (earning more than it costs to maintain), where ownership in the name of the lower income earner may be beneficial to ensure any surplus rental income is assessed at a lower marginal tax rate.
Capital Gains Tax
When you eventually sell the property, Capital Gains Tax (CGT) applies to any profits made. If the property is held in the name of a lower-income earner, CGT will be paid at their marginal tax rate, which could result in a tax saving. If the property is owned jointly, the capital gain will be shared according to the ownership and assessed at the marginal tax rate of both individuals. CGT discounts of up to 50% may also apply if the property is held for more than a year.
Land Tax
If you own multiple properties, land tax can be another significant cost. Land tax thresholds differ between individuals, trusts, and companies, and each unique structure is assessed separately. As such, if a couple already owns a property, consideration should be given to how the ownership of another property would be assessed for land tax to see if any tax savings can be achieved.
How We Can Help
Choosing the right ownership structure for your investment property depends on a variety of factors, including the property itself, your tax position, and your long-term intentions for the property. Although we have only touched on tax implications, there are also relationship factors and asset protection considerations. At Northhaven, we help clients to understand the implications of different ownership structures and make a recommendation based on your unique circumstances to ensure that investments are set up correctly from day one.
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