Investors need to be informed and educated on the ownership structure of their property portfolio. The right structure can have a significant impact on tax, depreciation, cash flow and what should happen in the case of a deceased property. The most common ownership structures include individual ownership, joint ownership, ownership through a trust or Self Managed Super Fund (SMSF). Seeking the advice of a financial professional from the outset will help identify which is best for your property strategy, and outline the different tax implications and potential risks.
Joint ownership structure: tenants in common�
A joint ownership situation is where two or more people own a portion of the property. Often joint ownership is between husband and wife, siblings or friends who purchased the property together, however, anybody can enter into a tenants in common agreement.
A tenants in common structure gives owners the ability to split the share of the asset whichever way makes sense for all parties. For example, if there are two owners of a property it does not automatically mean both owners need to hold a 50 percent share, but rather they could split it 60/40 for instance.
Unlike other joint ownership structures, if a tenant in common passes away, the share of property they owned does not automatically go to the other titles on the property. But rather, the asset can be distributed as per the details outlined in their Will. It’s important that all parties involved in the ownership of a property understand the legal and financial implications should an owner pass away.
A tenants in common structure differs to a joint tenant scenario. A joint tenant structure generally involves defactos or married couples who own a property together. Under this structure should one of the partners die, the other partner will automatically claim the rights of the property.
So, how does tenants in common improve cash flow?
A common scenario for a tenants in common structure would include a husband and wife who have substantially different incomes. For instance, if the husband earns the lion’s share of the household income, and the wife works part-time earning less, the couple might distribute the property’s ownership as 99 percent to the husband, and 1 percent to the wife. This means that 99% of the tax benefits apply to the higher earner including depreciation, interest bills, council rates and notices. This will improve day-to-day cash flow.
The significant tax benefits of the tenants in common structure contribute to extra cash flow for investors to lessen the financial burden of investments or to reinvest.
One of the other benefits of a tenants in common structure is that it provides investors with an easier method to enter the property market or sustain an existing property portfolio. The ability to team up with one or more people means mortgage repayments and expenses are split, therefore making assets more manageable and improving borrowing capacity.
To find out more about the tenants in common structure contact me on 02 9095 6888