Issues to Consider Before Transferring Half of Property to Spouse

Question

Hi, in October 2014 I bought an investment propoerty in Townsville just in my name for tax purposes as I was the higher income earner. This was rented out from purchase until February 2018. My wife and I then moved into the property and it became our principal place of residence. From when we moved in I have kept track of all expenses spent on the property using your Capital Gains Tax spreadsheet. Since we moved in we have raised the house, built a shed and a carport and we are now building in underneath and this area downstairs will be a two bedroom self contained unit. We will continue to live upstairs. The property won’t be strata titled but will in effect be two equal size self contained units. Initially we used money from a redundancy I received to fund the renovation work but we recently refinanced the house loan to get more funds to complete the renovation and the bank added my wife to the mortgage for serviceability on the loan. The title at this stage is still in my name only. Once the renovation is complete we intend to use downstairs as an Air B n B and we will live upstairs.

My question is should I get my wife added to the title so that when we start renting downstairs we can tax claim deductions against both of our incomes. She is on the loan but I am assuming she needs to be also on the title. My wife is now the higher income earner. If I do the transfer to her does it trigger capital gains tax and if so for the full amount of just the half I transfer to her? I do think that the amount we have spent with our purchase price we probably haven’t realised a gain, so there is a good chance it will show as a loss anyway.

What’s the best way to approach this? I just think it would also be cleaner as we could reset the cost base purchase date by doing this and then moving forward the house would be half owner occupied and half investment property. I also think it is going to get complicated moving forward as the house was first just an investment property for four years, then owner occupied for three and a half years and then it would be 50/50 investment and owner occupied. Appreciate any advice you can give. I know this is probably an unusual situation. Feel free to contact me if you need anymore information.


Answer

Resident Tax Rates 2020–21

Taxable incomeTax on this income
0 – $18,200Nil
$18,201 – $45,00019 cents for each $1 over $18,200
$45,001 – $120,000$5,092 plus 32.5 cents for each $1 over $45,000
$120,001 – $180,000$29,467 plus 37 cents for each $1 over $120,000
$180,001 and over$51,667 plus 45 cents for each $1 over $180,000

The above rates do not include the Medicare levy of 2%.

As you can see from the above you and your spouse are in the same tax bracket and may well stay that way as it is a large bracket. It does not matter if you are at the bottom or top of the tax bracket, as long as you are both in the same tax bracket then you have maximized the tax outcome of splitting income between you. That salary sacrifice your wife does will not be included in her taxable income so she is probably have a slightly lower taxable income than you but also this is going to change over time as properties go from negative to positive. It is a pretty safe bet you are going to be in the same tax bracket till one of you retires.

Consider that this Airbnb venture might not always be a tax loss, I would hope you will one day make a profit.

Yes your wife would need to be on the deed, it would only be a transfer of half the property, still leaving your half with various splits anyway. All that would be achieved is you would have to keep records one way for your half and another way for your wife’s half. Because it is going to be used to produce income after it is transferred to her there is always going to be a big record keeping responsibility.

When you sell and have to pay CGT one day it may be beneficial to have two people to spread it across otherwise it might push one of you into a higher tax bracket than the other but that has a lot of unknowns. What we do know if you transfer half of the property now is:

  1. You will be up for stamp duty on half the value of the house
  2. There is a CGT event on transfer of part of the house – profit or loss
  3. If it is a capital loss then you are losing some of your cost base by resetting it to a lower value (market value) in your wife’s name and giving yourself a corresponding capital loss to carry forward. Your wife’s loss of cost base will be greater than your capital loss that you carry forward because all the holding costs cannot create a capital loss. Do nothing and at least these are still available to use one day.
  4. If there is a capital gain, that is a tax you have to pay now with no real income and may never happen in the future.
  5. No matter which way you go there is always going to be a big record keeping responsibility because part of the property is being used to produce income.
  6. The ATO could argue that half the loan is no longer used to produce income because half the loan purchased a gift you gave to your wife
  7. The ATO could void the arrangement anyway arguing Part IVA. An arrangement with the dominant purpose of a tax benefit.

Tips:

  1. If you keep it in your name make sure you document that your wife lent you her half of the loan. Just a loan agreement you may be able to download off the web.
  2. Keep receipts for everything, hoses, plants, cleaning materials even for upstairs, rates, insurance, interest etc. They will either be deductible against the rent or increase the cost base.
  3. Consider living in both upstairs and downstairs initially as one dwelling. Apparently how a duplex starts out determines whether it is one dwelling or two. You are going to be treated like you are renting out part of your home for tax purposes anyway. If you can show that initially it was used as just one dwelling, then if you ever decide to stop using it for income producing purposes you can cover it completely with you main residence exemption again. You can only cover one dwelling with your main residence exemption so you want to be able to argue it is just one dwelling and you just rented out part of it.
  4. Don’t ever change your wife’s salary sacrifice to paying off the loan else you will lose the deductibility of the interest.
. .
Have a question about tax you need answered?

. Ask your own tax question here for only $79.95