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.
The pros and cons
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:
Co-ownership pros
- Ability to pool your money with friends or family to buy your first home or enter the market as an investor, sooner.
- No need to save up for a full deposit.
- You can combine your borrowing power to borrow the rest from a loan provider.
- Gives you more property options to choose from.
- Reduces transaction costs as well as living costs.
Co-ownership cons
- Property co-ownerships can test relationships and put your finances at risk. Friendships change, and sometimes a falling-out can happen which can be disruptive and costly to the co-owner.
- Co-owners are liable for each other’s debts if they are using the co-owned property as security for their mortgage.
- Sometimes a co-owner may not share ongoing costs which can cause tension.
- One of the owners may want to sell while the others don’t.
- Co-owning may affect your future borrowing power as some lenders see the whole co-ownership loan as your responsibility not just your share of the loan.
The legal process of co-ownership
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
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
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.
Steps to create a co-ownership agreement
- Determine your ownership type: Decide whether tenancy in common or joint tenancy suits your current situation.
- Seek professional legal advice: Avoid any legal fees or disputes by having a lawyer and property manager walk you through the co-ownership agreement.
- Draft the agreement: Have a lawyer draft the co-ownership agreement outlining mutual obligations.
- Sign the agreement: All parties involved must sign the agreement in the presence of a notary or legal authority.
- File the agreement: The co-ownership agreement is now formalised, and provides legal recognition of the new ownership arrangement.
What is a co-ownership agreement?
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.
Common clauses included in co-ownership agreements
When you sign a co-ownership agreement, you are acknowledging and agreeing to several key clauses, including:
- Ownership shares: This defines the percentage of the property owned by each party.
- Financial responsibilities: This details each co-owner’s financial obligations concerning mortgage repayments, taxes, insurance, and maintenance costs.
- Transfer of shares: Outlines the procedures for selling or transferring ownership shares.
- Death or bankruptcy: Addresses what happens to the surviving co-owner/s share of the property in the event of the other co-owners death or bankruptcy.
- Conflict resolution: Conflict resolution in co-ownership includes mediation and arbitration to avoid legal disputes
- Exit strategy: Co-ownership exit strategies details the process for a co-owner to exit the agreement, including options for buying out their share or selling the property.
What is co-ownership’s impact on tax?
Property co-ownership can impact taxes in different ways. If you go into joint ownership with someone, the main tax obligations affected include:
Capital Gains Tax (CGT)
According to the Australian Taxation Office (ATO), if you go into a property co-ownership, you need to establish each owner’s share or interest in the property for capital gains tax purposes.
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.
Land Tax
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.
Income Tax
As per the ATO, rental income and expenses for income tax purposes must be allocated according to their legal interest in the property.
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.
Tax benefits of co-ownership
Property co-ownership can offer several tax benefits, including:
Shared expenses
In a co-ownership agreement, co-owners can divide property-related expenses, potentially lowering each co-owner’s taxable income.
Depreciation
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.
Capital Gains Tax (CGT) discount
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.
Negative gearing
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.
What is group financing?
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.
Pros and cons of different financing options
Joint mortgage
Pros:
- Combining incomes can help to secure a higher loan amount
- Typically better interest rates and terms
- Mortgage repayments are shared between co-owners
Cons:
- All co-owners are equally responsible for the mortgage, which may become problematic if one co-owner defaults
- The mortgage can be affected if one co-owner has credit issues
- Potential for disputes and complications in co-ownership if relationships change
Individual mortgage with co-signers
Pros:
- Allows for one primary borrower with co-signers to secure the loan
- Co-signers can help improve loan approval
Cons:
- Co-signers are equally responsible for the loan, which can impact their credit if payments are missed
- Not all lenders offer this option
Personal loans
Pros:
- A simpler application process compared to mortgages
- No need to use the property as collateral
Cons:
- Generally lower loan amounts with higher interest rates
- Can only be used as part of your deposit to buy a home
How to apply for a joint mortgage
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.
Co-ownership exit strategies
If one party wants to exit the co-ownership, they have the following options:
- Selling the property: The co-owner wishing to exit will need to organise with the other co-owners to either buy them out or list the property for sale. The sale process should be managed under the terms outlined in the co-ownership agreement.
- Buyout: In some cases, the remaining co-owners might choose to buy out the existing party’s share of the property. This requires an appraisal to determine the fair market value of the share and financing arrangements to complete the buyout.
- Transferring ownership: Alternatively, the departing co-owner may transfer their share of the property to another person or party.
It is essential to consult a legal professional to navigate these procedures properly.
Long-term planning
Estate Planning and Inheritance Issues
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.
Future-Proofing the Co-Ownership Agreement
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.
Property management
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.
Trust the experts
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.
Share
