VIC Tenants in Common Selling Property - Stamp Duty, CGT Issues?

[Cubbie]

Hi there,
Hoping someone can assist. I own 2 properties with my sister 50/50 and she wants to sell one of them. I don't have a problem with selling. She suggested removing me off the title of the investment property and her off my principal place of residence (PPR). I'm trying to understand what the implications are as the State Revenue Office (SRO) and their website aren't helpful to me - doesn't seem clear cut for my situation.

Are we better off changing the titles over prior to the property going on the market or post?

If I am correct, I won't be up for Capital Gains Tax for my PPR however she will be. I'm guessing I will have to pay stamp duty (50%) and transfers costs. She resides in the U.S. so I'm guessing she'll be taxed as a foreign investor? I have a feeling, it's going to get nasty.

 

[Tracy B]

Hi,

Is your sister proposing that you become 100% paper/legal owner of your principle place of residence, and she becomes 100% paper/legal owner of the investment property? I'm guessing the properties are of different values? To transfer your share in the investment property to your sister, and to have your sister do the same in your principle place of residence will involve CGT. Even if the transfers are a gift, you will be charged CGT against the market rate of the property. If you are swapping your share in Property B (investment property) for her share in Property A (PPR) then make sure the value of the shares are roughly the same.

If you are buying it off each other using the market value, then there doesn't appear to be a difference because if you sell your share in the principle place of residence, you will receive 50% of the profits and will not need to pay CGT on this. For the investment property, you will receive 50% of the profits and will need to pay CGT on this. Hence, your position in relation to CGT appears to be the same whether you agree with your sister's proposal or not.

 

[Tim W]

Hi there,
Hoping someone can assist. I own 2 properties with my sister 50/50 and she wants to sell one of them. I don't have a problem with selling. She suggested removing me off the title of the investment property and her off my PPR. I'm trying to understand what the implications are as the State Revenue Office (SRO) and their website aren't helpful to me - doesn't seem clear cut for my situation.

I agree with @Tracy B about the CGT liability. But she is being nice.
My thoughts here? Don't do this. Just don't.

Are we better off changing the titles over prior to the property going on the market or post?

Don't do either. If you want to sell, just sell it/them as it is/ they are, and divide the proceeds.
Yes, this will probably be a CGT event. It will be important to accurately calculate the taxable capital gain, but there's no legitimate way to evade CGT here.

If I am correct, I won't be up for Capital Gains Tax for my PPR however she will be. I'm guessing I will have to pay stamp duty (50%) and transfers costs. She resides in the U.S. so I'm guessing she'll be taxed as a foreign investor? I have a feeling, it's going to get nasty.

Here, I'll hit you with it in (what might be offensively) plain terms:
You are uncomfortably close to being a party to a conspiracy to evade Capital Gains Tax.
This is not a path I would recommend to clients.

 

[Cubbie]

Hi Tim,
Thanks for responding. How am I close to being a party of conspiracy to avoid CGT? It was her suggestion, based on advice she'd received. I don't want to sell my PPR, we love where we are and wouldn't be able to afford to stay on the area.

 

[Cubbie]

Hi,

Is your sister proposing that you become 100% paper/legal owner of your principle place of residence, and she becomes 100% paper/legal owner of the investment property? Correct I'm guessing the properties are of different values? Mine is 1.1 and the other 900k. To transfer your share in the investment property to your sister, and to have your sister do the same in your principle place of residence will involve CGT. Even if the transfers are a gift, you will be charged CGT against the market rate of the property. If you are swapping your share in Property B (investment property) for her share in Property A (PPR) then make sure the value of the shares are roughly the same. I'll need to give her more.

If you are buying it off each other using the market value, then there doesn't appear to be a difference because if you sell your share in the principle place of residence, you will receive 50% of the profits and will not need to pay CGT on this. For the investment property, you will receive 50% of the profits and will need to pay CGT on this. Hence, your position in relation to CGT appears to be the same whether you agree with your sister's proposal or not.

i figured I'd be up for 50% stamp duty as well.

 

[Cubbie]

Sorry Tracey, I replied inline to your other questions.

 

[Tracy B]

Hi Cubbie,

Do you want to sell your PPR? If not, what your sister is proposing may make a bit more sense. In this case, you will buy her 50% share in the PPR off her, in exchange, she buys your 50% share in the investment property off you. She then sells the investment property and you continue to live in the PPR. Is this what she is proposing?

In this case, you will need to look at each sale as a separate CGT event. You are selling 50% share in an investment property. This means, you will likely owe CGT on this 50%. She, similarly, will be selling 50% in your PPR, as this is not your sister's PPR, she will owe CGT on this sale. In the end, the position is the same.

 

[Cubbie]

No, don't want to sell our PPR. That's what I thought. Question, am I better off changing the title before listing the investment or after the fact. Would you advise having a contract drawn up stipulating the exchange of properties, title changes in case she reneges?

Where are you located in Vic?

 

[Tracy B]

Hi Cubbie,

Would you advise having a contract drawn up stipulating the exchange of properties, title changes in case she reneges

Yes, definitely record everything your agree on in writing. Remember, you are not "exchanging" the shares. She is purchasing your share in the investment property, and you are purchasing her share in the PPR. You should do this as two separate sale and purchase agreements as they concern two separate properties.

am I better off changing the title before listing the investment or after the fact

This is up to you.

Scenario 1 (sell first): The two of you can sell the investment property as tenants-in-common. There will be two vendors in this case. Both of you will need to sign the sales agreement. After you receive the purchase money, you can divide the proceeds. Then, using your share of the proceeds, you can purchase your sister's 50% share in the PPR. This will be a separate transaction. This may be easier and safer as you already have the money in hand, rather than a valuation. It will also mean your sister will not need to purchase your 50% share in the investment property first, which saves the cost of one transaction. In other words, there will be two transactions ((i) sale of the investment property to third party with both you and your sister as vendors, and (ii) purchase of your sister's share in the PPR using the proceeds from investment property).

Scenario 2 (transfer then sell): there are three transactions overall: (i) sister purchases your share in investment property, (ii) you use sister's money to purchase her share in PPR, and (iii) sister sells investment property). However, sale (iii) will not concern you, but may save your sister some money. Therefore, as you can see, in both scenarios, you are only involved in two transactions. So, there is not much difference. You may use the fact that you are saving your sister from a transaction (if you go with scenario 1 compared with scenario 2) to negotiate paying a lower share of the costs of the sale of investment property to third party. However, I definitely recommend you prioritise having a good relationship with your sister as primary concern.

Whatever you decide, you need to record it in a written agreement. Best to have all three (or two) sale and purchase contracts drafted up and ready to sign. You can have one of the contracts conditional upon the other, or have the sales refer to one another. However, definitely record everything in writing.

Where are you located in Vic?

I hope you found my responses helpful. Unfortunately, I am not taking on clients at the moment. However, you can fill in this form on lawanswers and get connected with a lawyer that specialises in Victorian property law who is able to help you.