Legal Tip 68: Avoid 99%/1% ownership of property

Avoid 99%/1% ownership


Sometimes I see clients that own property tenants in common with spouses 99/1 shares. One spouse owns 1% and the other owns 99% tenants in common.


The only benefit I see with the 99% owner cannot deal with the property without the permission of the other owner - cannot mortgage, sell, discharge mortgage, borrow against etc


But there are significant disadvantages.

1. Risk

The 1% owner is liable for the whole debt. They are exposing themselves for little reward. This is probably the greatest disadvantage.


2. Tax Returns

Extra work putting down 1% of costs and expenses. Hardly worth the bother!


3. Borrowing capacity shot

Where the persons want to buy a subsequent property in single names they will each be assessed at the whole debt, not their individual shares, but only taken into account their ownership percentage of the rent received. A double whammy which hurts borrowing capacity.


4. Land tax

In some states they will be assessed on land tax as a single unit which could make a difference to whether they pay more land tax or not. Joint owners will be jointly liable for land tax too.


5. No Spousal Loan opportunity

A person cannot lend to themselves, but they can lend to a spouse so there are law and tax strategies which are not able to be used where both own the property.

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Where one spouse is worried about the other spouse potentially selling or mortgaging a property without their knowledge they can always lodge a caveat to protect their interest - but seek legal advice on the asset protection consequences.


Spouses can generally be on loans whether they are on title or not. They can be joint borrowers without affecting the deductibility of interest, or they could be guarantors. The non owner spouse may be necessary to get the loan approved initially but could be removed from the loan down the track if the situation changes.

 

There are also some people who also flat out refuse to consider anything but 50/50. The old whats mine is yours view. Then they moan about the wife sharing in losses while she is off work tending the flock. A bit like the types that want to have their kids in a SMSF or name all the kids and the pet hampster (OK not the hampster) in the discretionary trust when the clauses for potential beneficiaries includes them anyway.

The Family Court really doesn't care if you are on or not on title and take a broad approach to matrimonial asset ownership.

Sharing isn't always caring. There can be genuine grounds for a individual to never own the family home.

 

Hey guys, question question in regards to our ownership structure going forward.

I earn about $50k and my wife earns about $80k. I'm hoping my wage bumps up to $100k within 3 years and my wife is going to be a stay-at-home mum in 3 years time and will be earning a minimal income.
My aim is to buy 2 IP's within the next 6-12 months.
Should I keep the first IP as at 50:50 split as we'll be in the same tax bracket over the next few years? Then maybe move to a high ownership structure % for myself for the second IP so when we has kids and she a minimal income, I'll be to gain maximum tax benefits?

 

In further support of Terry's post, an ownership structure of 99/1 % isn't going to solve this problem, or if it does, it's probably unnecessary.

Quite often we'll see a couple where they're buying a heavily positive geared property, usually by virtue of a lot of spare cash is going into an offset account. For tax purposes it makes sense for the low income earner to own the property, but their income doesn't service the loan. As a result their partner is also required to be on the loan as their income will demonstrate serviceability.

In this case a 99/1 ownership split is almost certainly not required. Lenders will recognise a spouse relationship as an interested party without being on the title at all. The income earning partner can be on the loan even if the low income earner has 100% ownership of the property. Splitting ownership 99/1 isn't necessary and only opens the higher income earner to additional liability and costs as Terry has suggested in his other points.

Another scenario I've seen is where the two partys are not related by marriage and one part is providing the serviceability as a favour. In one particular case the son was a keen investor with a substantial portfolio and a good income as an IT contractor. There was no doubt he could service on his own, but he'd changed his employment arrangements from a PAYG basis to an invoicing basis. As he's now self employed (for 2 months) he can't qualify for finance even though we all know he can afford it.

His Mum offered to by a joint borrower (good income, no interest in further borrowing and she wants to help her son). As it's not a spouse relationship she needs to be on the title in some capacity in order to be allowed on the loan. Initially they wanted a 99/1 split but the banks wouldn't recognise a 1% ownership as a true interest in the property, it's only there for convenience. They ended up going for a 90/10 split which the banks found acceptable.

Obviously not an ideal situation. The son did change his employment arrangements back to PAYG a few months later, he bought Mum out but had to pay stamp duty again on that 10%. CGT was negligible over the time period.

 

I would still be reluctant to buy 50/50 as you lose so many potential strategies. Look into spousal loan strategies and spousal transfer strategies can work especially where one spouse will have little to no income in the future.

 

So why does one do 99:1 ?
Could it be for liability issues where the person who gets the 1% is the director of a company ?

 

People have all sorts of reasons - mostly ill conceived.
Sometimes the 1% owner wants to feel they have some sort of legal ownership in the property.

 

The main reason I've experienced is like Terry's; people want to be seen to have a legal interest in the property. If they separate they want to be on the title.

I suspect there's other legal avenues for protecting your interests which don't play havoc with your finance and investment strategies. I don't think there's much merit in 99:1 ownership splits.

 

For quite a few lenders IME, they won't (or wouldn't when we tried - things may have changed) allow joint borrowers unless both borrowers had a legal interest in the property.

So if you needed joint borrowers to get enough serviceability and you wanted the gains / losses to go predominantly to one borrower, it's a legitimate strategy, albeit with the downsides that Terry and others talk about. Of course, for a pure IP you could use a DT with personal guarantees for the same purpose (for distributing gains - doesn't work for losses!) but if you're buying an IP which you want to turn into a PPOR later (and claim the CGT exemption from that point), that doesn't work.

There's always a scenario where it makes sense. That was one that we had over ten years ago - no issues so far...

 

Thanks Terry. I've done some research from the somersoft and PC forums and this is what I've come up with so far. So my wife and I have our PPoR at the moment in joint names (which I feel might not have been the best option in hindsight). I'm aiming to buy our first IP in Victoria (and in regards to the spousal strategies, it appears to have more relaxed rules than WA and QLD) and was thinking of putting my wife alone on the title and the loan. So when we go down to one income in a few years, we can do the transfer of 50% of the property, which will save us the stamp duty plus we could go about the debt recycling strategy (through paying down our non-deductible debt), plus I'd imagine the CGT gains would go to my wifes income (which would be minimal).

I'm thinking of asking for some professional advice but thought I'd ask here to see if I'm on the right track or if there are other strategies that could be put in place as well?

 

Yes that sounds like a good strategy. But get legal advice as there are various consequences.

 

I had this experience too. For serviceability all our loans are in joint names (mine and Wife's). But the Titles of our IPs were put either in her name or my name, to reduce land tax. For our recent purchase one lender insisted that both names need to be on the title, so had to go with 99%:1% ownership.

 

May I ask which lender?

 

It was NAB

 

Interesting. I have no had this problem with them. You probably could have pushed a bit harder.

 

I should add one of our professions allows a 90% loan with no LMI, NAB wanted that person on title, not the other one, so had to go with this compromise rather get an outright reject in the 11th hour.

 

Westpac are one that would allow a non owner to be on the loan and not on title with this non owner being a professional lawyer/doctor/CPA etc with the LMI being waived.

 

@Terry_w Isn't it an exemption in some states that one can transfer shares between spouses without paying CGT? If so that sounds like a benefit to me.

 

Not CGT, but stamp duty.

Tax Tip 100: Transfers between Spouses and CGT https://propertychat.com.au/community/threads/tax-tip-100-transfers-between-spouses-and-cgt.9275/
Tax Tip 101: Transfers Between Spouses and Stamp Duty in QLD Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW
Tax Tip 102: Transfers Between Spouses and Stamp Duty in the ACT Tax Tip 102: Transfers Between Spouses and Stamp Duty in the ACT
Tax Tip 103: Transfers Between Spouses and Stamp Duty in VICTORIA Tax Tip 103: Transfers Between Spouses and Stamp Duty in VICTORIA

 

Thanks @Terry_w. Sorry, I ment stamp duty. Interesting as I thought there were some states with no stamp duty on such transfer.