When it comes to purchasing a property with another person, the manner of how you own a property is a decision that is commonly overlooked. Therefore, it is important to consider the division of ownership before taking that leap.
There are two types of property co-ownership: joint tenancy and tenancy in common. Both have distinctive legal and financial implications on your rights as the registered proprietors of the property.
What is the difference between joint tenancy and tenancy in common?
Joint tenancy is a form of ownership where the owners jointly and equally own the entire interest in the property.
If you buy a property as joint tenants, on the death of one tenant, the surviving tenant automatically acquires ownership of the whole property. There is no separate distinct ownership interest in the property.
Given the ownership will automatically revert to the surviving tenant upon death, regardless of any contrary intentions of the deceased tenant, it is crucial that you understand the way your property is co-owned when undertaking your estate planning.
Joint Tenancy is most commonly used for a married or de facto couple as the owners are treated as one person for the purpose of ownership, similar to that of a joint bank account.
Tenancy in Common
If you buy a property as tenants in common, each tenant’s share (interest) is separate and may be dealt with as such, for example – selling of one share. In the event of the tenants’ death, their share will be distributed in accordance with their Will (, –or the rules of intestacy if they die without a Will).
The shares can be equal or unequal. It is up to you and the other tenants to decide on how you choose to split the shares. For example, one tenant may own 45% of the shares and the other tenant owns 55%.
Tenant in common is most commonly used in the context of investment purchases or purchasing with family or friends, particularly where unequal contributions are made.
Does owning a property with another person affect my mortgage and loan repayments?
Generally, banks are not too concerned with how ownership of the property is split. When applying for the loan, banks assess the loan as a joint application and hold you jointly and severally liable for the loan. This means that if one tenant is unable to repay the mortgage, the other tenant will be fully liable for the entire repayment.
However, some banks can set up a split loan arrangement to enable each tenant to contribute their share of the repayments.
It is important to be mindful that if you own a share under tenancy in common, the value of the entire property will be assessed as a debt. In other words, where Party A is tenant in common in respect of 50% of the property the entire value of any loan outstanding in respect of the property will be assessed against Party A.
Can I sever a joint tenancy?
Common circumstances where you may want to sever a joint tenancy:
- Due to a breakdown of relationship with your spouse or partner and you no longer want them to receive the property you own with them as joint tenants.
- You have a blended family and wish to dispose of your share of the property to your children from a previous relationship.
- You simply want to maintain separate financial arrangements from the co-owner.
You can sever a joint tenancy with or without the consent of the other tenant and no stamp duty is payable on the transfer as long as the proportion of the shares does not change – that is, so long as a tenancy in common in equal shares is created as a result of the severance.
Documents will need to be registered at the relevant land registry to sever a joint tenancy and record the changes on title.
You should consult a solicitor before making any changes to the ownership structure.
What are the tax implications on co-ownership?
Owning a property with another person can have an impact on different taxes in different ways.
Capital Gains Tax (CGT)
Tax law treats joint tenants as having an equal share in ownership of an asset, and tenants in common as owning their prescribed share in the asset. For capital gains tax purposes, the net capital gain split across owners based on their ownership percentages. This means if two people hold joint tenancy over a property, this will be treated by tax law as holding 50% each.
If this property is your main residence, then the main residence exemption may apply and you can disregard CGT entirely. Note that special rules apply where a couple in a relationship owns separate main residences, but these circumstances can be complex and you should seek advice from a tax practitioner.
For income tax purposes, most commonly when earning investment income from a property, the tax law treatment is similar to CGT. Joint tenants are treated as having an equal share in the asset while tenants in common are treated as owning their prescribed share. Net rental income (or losses) are allocated to the owners based on their share in the property.
In some states and territories, land tax is jointly assessed for joint owners as if the land were owned by one person, regardless of whether you are joint tenants or tenants in common. This means joint owners will be deemed to be the primary taxpayer. If one of the joint owners own a property outside of the co-ownership, a separate assessment is made and he or she is deemed to be a secondary taxpayer.
What type of co-ownership is right for me?
If you are unsure which form of tenancy you should consider, speak to our property and estate lawyers who can provide advice on the best form of ownership for you, the effect on selling property in the future, and your estate planning.
If you have questions regarding the tax implications on co-ownership, you should consult your financial advisor or speak to our accounting team about each co-ownership arrangement.
Tiffany joined us as a Property Lawyer after having been practicing exclusively in property and commercial law since her admission as a Legal Practitioner in the ACT Supreme Court.
Tiffany’s focus is to deliver excellent legal service and client experience, in particular, helping first home buyers navigate the complexities of purchasing their first home.
Siobhan takes pride in providing high-quality service to every one of her clients. Whether it’s buying a first home, or selling an investment property, her main objective is to provide her clients with a conveyancing service that is easy to understand, while still obtaining the desired result.
Her clients appreciate her positive nature and straight-forward approach, knowing they are in safe hands.