When thinking about buying a property, it’s important to consider ownership rights. Married couples will often pool their resources to be able to afford a home, but many who do this don’t understand the legal & financial consequences of doing so.
First off it’s important to understand why this topic is so important. If you have bought a home, or are considering buying a home with a partner, you must understand that you are entering either a Joint Tenancy or a Tenancy in Common. These two legal frameworks refer to how the property in question is split up, in terms of both financial & legal ownership. Your rights are significantly different between the two, however the end benefit is the same; you gain a share of a property.
In Australia, Joint Tenancy is the most common method of co-ownership for property. The reason for this is down to the rights over the property. Within a Joint Tenancy, no matter how much each party puts in financially to the property, the rights over the value are equal. For example if I was buying a property with my wife to the value of $600,000, I put in $500,000 and my wife puts in $100,000, we both own the $600,000 property, with neither of us entitled to any more than the other.
Financially, Joint Tenancy is all about ‘equality’ between the two parties. For example in the event of the property being sold, Capital Gains Tax incurred on the value of the property is the same for all members of the ownership, with the tax being calculated off of the highest income earner within the agreement. In the same way, when taking out a mortgage to purchase the property, each member of the Joint Tenancy is dealt with as one person. Ultimately, it doesn’t matter who pays back the loan amount, so long as the repayments are being met.
Joint Tenancy also has legal consequences in the event of one party’s death. When a member of a Joint Tenancy passes away, the ownership of all aspects of the property go to the surviving member. This not only includes the ownership of the property, but also the mortgage amount and other outstanding payments.
Tenants in Common have significantly different characteristics. Unlike the ‘equality’ that Joint Tenancy has, Tenants in Common is more about splitting ownership by the financial input of each party. For example, if I was to be buying the same $600,000 property with my wife, myself putting in $500,000 and her putting in $100,000, I would be entitled to five-sixth’s of the property value, whereas she would be entitled to one-sixth. This also has the second perk, in which both parties have control over the sale of their individual ownership of the property in question. At any point I could sell my five-sixth’s ownership to somebody else, while my wife still owns her portion of the ownership.
Because Tenants in Common is all about splitting up ownership, it also involves the splitting of financing. Having said that, any mortgage taken out under Tenants in Common is typically a shared responsibility between all parties. If one person defaults, then the others will need to make up the repayments. Counter to that, Capital Gain Tax amounts are dependent on each individual parties income, and in the event of one party’s death, the repayments on a mortgage as well as the value of the ownership are all dictated by that individuals Will, the other owners being completely out of the picture.
For both frameworks, a Co-Ownership Agreement must be made which dictates how rights and responsibilities of the property are divided. The role of each member is completely down to what is agreed upon within this agreement, and after purchase these roles become legally binding. For example, the agreement might specify that any appliance to be replaced is to be paid for by one party, and council rates are to be paid by another.
What does this mean for you?
By knowing what your rights are when entering either a Joint Tenancy or a Tenants in Common Agreement, you can plan how to make the most back from a property purchase. For example if a member of a couple inherited a large amount of money, and was on a low income bracket, then a Tenants in Common agreement will allow that individual to be charged less tax upon the sale of the home, meaning more money to be made for that individual.
As a special bonus for this weeks blog, we are offering a complementary 30 minute discussion with McCarthy Group founder Stephen McCarthy, to discuss just how much money you could be saving on your own property through a different co-ownership framework.