Co-ownership of investment property: the tax implications

If you are looking to buy a property with somebody else, perhaps a spouse, another relative or simply a business partner, it’s essential to make sure you structure the transaction correctly, particularly if each party is contributing a different amount.

If the property is owned by more than one person, rental income and expenses must be split between each co-owner according to their legal ownership interest in the property. Generally, taxpayers own a property either as joint tenants or tenants-in common. They sound similar but the tax implications of each can be profoundly different:

“Joint tenants”

The owners share in all aspects of the property asset equally. If two people hold equal shares in a property as joint tenants, any separate agreement that deductions be claimed on the basis of a different ratio would be ineffective for tax purposes. If, under this arrangement, one partner assumes greater financial liability than another, that is regarded as a private arrangement by the ATO and therefore the portion of expenses claimed which exceed the 50% partnership share would not be deductible. So, if you are planning to invest in a different proportion from your co-investor, you should instead be looking to structure the transaction as tenants-in common.

Note there can be more than two joint tenants to the agreement although it is most common to see joint tenancy in the form of a marriage partnership.

TIP: Husbands and wives who buy investment properties together are joint tenants and are treated for tax purposes as sharing in income and deductions equally. Any argument that one spouse has contributed more and should therefore be entitled to a greater share in any deductions (an argument commonly made where one spouse pays tax at a higher rate than the other) will fall on deaf ears with the ATO.

On death, the property automatically passes to the other joint tenant. It does not go through the deceased estate. If the joint tenant who dies acquired their interest in the property after 20 September 1985 (the date Capital Gains tax was introduced), the surviving joint tenant is regarded as having acquired that share at the original cost to the deceased. If however the joint tenant who dies acquired their interest in the property before 20 September 1985, the deemed cost base to the surviving joint tenant is the market value of their interest on the day they died.

For the 50% discount for CGT, you must have owned the asset for at least 12 months. As a surviving joint tenant, for the purposes of this 12-month test, you are taken to have acquired the deceased’s interest in the asset at the time the deceased person acquired it, not at the date of death

“Tenants-in-common”

Each owner may hold an unequal interest in the property, for example 60% for one and 40% for the other. This ownership structure is common where friends decide to purchase property together. Each party that owns a share of the property has the right to sell or transfer their interest in the property to a third party.

Where the owners hold the property as tenants-in-common, each owner holds their share of the asset outright, will be taxed on income and will receive relief for deductions based on their proportion of the investment (60:40 in this example).

On death, the relevant share of the property goes into the deceased estate and is dealt with according to the deceased’s Will. It is not automatically inherited by the surviving owners.

H&R Block is Australia’s largest network of tax accountants with over 440 offices. Every year we help thousands of Australians achieve a better taxation result. For your nearest office call 13 23 25.

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