Tax return on co-ownership of investment property

oliman on 25/10/2016 - 00:28
Last edited 25/10/2016 - 11:49

Greetings to all,

I bought an investment property in Jan 2016, and just before buying it, a tax agent advised that I should buy it under my name as well as my wife's name (wife has no income) as the investment property was positively geared (the tax agent calculated annual rent and expected interest on loan). Being my first property purchase ever, I took his advise and changed the contract of sale and added my wife's name into it.

Few days ago, I went to another tax agent for lodging our tax return of 2015/16, and he told me that in my scenario, the income and expense of the investment property would go half/half in my tax return and my wife's tax return.

I suddenly realised the the expenses of the investment property were much higher than the income because…

1) The stamp duty after the purchase (around 8k)
2) Land title fee
3) Conveyance/lawyer fee
4) mortgage setup fee, 4.5) property insurance fee
5) Monthly loan payment interests
6) Property covering only for 6 month of the last financial year under our name

Hence I lost almost half of the expenses to be claimed for tax deduction because that half portion of the expense went under my wife's tax return and as she had no income, she got no benefit in tax return against the half of the total of those expenses.

I regretted on blindly taking the advise of that last tax agent while buying my investment property (and not researching on the facts) for putting my wife's name while buying the property.

My other tax agent who lodged the tax return for us few days ago told me that I have lost the half portion of tax deductible expenses return due to wife's no income and there is nothing that can be done about it.

Isn't that unfair? I mean it is obvious that if spouse has no income then definitely it is the husband/other partner who is bearing all the expenses from his sole income, yet he can only claim half of the deductions from his tax return…

I know it is my mistake too, and I should have done more research before putting my wife's name under the property, but there should be some way to request ATO to allow me the put all the income/expenses under my tax return to get tax eligible deductions back.

Any comments/suggestions?

Financial

Comments

      • T1OOO on 25/10/2016 - 14:57

        U got very bad advice. But can't u lodge a joint assessment ?

      • EnALup on 25/10/2016 - 14:57
        +4

        Didn't you save some money by splitting the rent as income between u and ur wife as it would be below or near 18k threshhold? Else it would have been all ur income and ur income slab might have changed and high tax.
        Also bear in mind that this income will remain for rest of duration you and ur wife owns the property and you will be saving in her income tax .
        If you dont mind telling, how much money you think you lost?
        If you cant go back in time and change, may be move on.

    • Drifta on 25/10/2016 - 23:37

      cant OP just say that his wifes interest in the property is only 25%?

      "However, if Mrs Hitchman’s legal interest was 75% and Mr Hitchman’s legal interest was 25%, Mrs Hitchman would have to include 75% of the income and expenses on her tax return and Mr Hitchman would have to include 25% of the income and expenses on his tax return."

      But as noted below, many of the expenses are offset against capital gains on sale and property could still be positively geared

      • oliman on 26/10/2016 - 11:12
        -1

        That applied to 'Tenants in common' and or ' Hitchmans owned their property as tenants in common'

        Me and my wife are not the tenants of the investment property. We live in a separate rented house.

        • snook on 26/10/2016 - 15:07
          +1

          hahaha - Tenants in common is what it on the title deed, or not.

        • oliman on 26/10/2016 - 18:13
          -1

          @snook:

          Where is the Title Deed? In Contract of Sale?

        • snook on 27/10/2016 - 11:54

          @oliman: when you purchase a property, the conveyancer asks you: Will you be 'Tenants in Common' or 'Joint Tenants' for the Title Deed.

          Ignoring how you've done no research about any kind of property ownership, here's a full explanation
          http://www.prime-conveyancing.com.au/Article-12/Joint-Tenant…

  • Almost Banned on 25/10/2016 - 01:02
    +32

    My take on your complaint
    You want to split your income with your non-working wife (or at least when it was positively geared you wanted her to carry half the profits on your investment)
    but
    you want to claim all of the expenses yourself.
    Sorry - the system doesn't work that way.

      • Rick Sanchez on 25/10/2016 - 18:03
        +8

        Oh so like double dipping right?

    • darkchoc on 25/10/2016 - 19:05

      A Discretionary trust structure let's you choose who to distribute profits to. But you can't distribute losses.

      • Providence on 26/10/2016 - 21:23

        But you can't distribute losses.

        Does this mean that the losses would be distributed 50/50 or that noone can claim them?

        • darkchoc on 26/10/2016 - 21:56
          +1

          Losses are deferred for future years when the trust names a profit, you can offset the prior losses.

          That's my understanding

  • whooah1979 on 25/10/2016 - 06:33
    -2

    Any comments/suggestions?

    rent out privately and get paid cash?

  • chumlee on 25/10/2016 - 06:56
    +20

    i thought the first few items on your list are not tax deductible but are added to your cost base of the property when it comes time to selling the property?

    If your wife has no income when you sell the property then she will pay less CGT anyway

    • Shamdog on 25/10/2016 - 15:22
      +3

      Correct, I'm fairly certain the first four costs OP has listed are capital in nature and will be added to the cost base of the property. Hence, they are not deductible expenses.

  • Savas on 25/10/2016 - 06:58
    +23

    You will find your OzBargain legal advisers are much better than any solicitor

  • DarkOz on 25/10/2016 - 07:12
    +2

    It's totally fair. You had a choice but you didn't assess your own situation properly and had chosen the wrong option. You thought it was positively geared but it wasn't. It's not your first tax agent's fault because his advice was based on your information provided.

    • oliman on 25/10/2016 - 09:48
      -1

      I agree I did not asses it properly, but I was assuming that my first tax agent would have considered 1) All the initial purchase setup costs like stamp duty etc 2) The financial year left with 6 months only which restricts the income to be over the costs.

      I just blindly followed his advise considering he might have evaluated all the factors in while giving me the advice.

      • yannyrjl on 25/10/2016 - 15:33
        +1

        chumlee and shamdog has it right on, the first few items are capital in nature, they can't be claimed as an expense, but rather added to your cost base and realised when you sell your property, so potentially you are still positively geared

  • bohn on 25/10/2016 - 08:06
    +4

    What time frame are you looking at with your investment?
    If short term, then you are worse off. If you are looking to the long term, eg 15years + you will be glad you have it in two names when it comes time to sell.

    • oliman on 25/10/2016 - 09:49

      I am planning to keep the property for around 10 years

      • ukulele on 25/10/2016 - 10:03
        +2

        It will all even out in the end, assuming the property becomes positively geared sometime in the future. Or if your wife starts working. The loss carries forward into following years so when it becomes positive it just cancels out the loss. But Bohn is right, when it comes time to sell, you will be much better off, assuming the asset has increased in value.

        I do find it interesting that you took on such a large investment without doing proper research? You simply cannot multiply rent x 52 then divide it by purchase price to get "yield" both the numerator and the denominator of that equation has extra parts which reduce the yield significantly.

        • oliman on 25/10/2016 - 11:57

          That was my first property, I did the research as much I was capable to do but was also depending on expert's advice.

          It is encouraging to know that it will 'even out' in future as YES my wife will start working and earning in future and YES we will keep this property for a long time before we sell it.

          Thank you for your insight uklele!

        • darkchoc on 25/10/2016 - 19:10
          +1

          @oliman: also as a note the the first year is almost always a bad year for losses.

          A number of those "expenses" like stamp duty, land duty, conveyancer fees are not deductible expenses for the income tax return. You might still have a "profit" where income is greater than deductible expenses.

        • [Deactivated] on 26/10/2016 - 19:40

          @Newplace:

          I'm surprised none of the tax agents pointed out that all of these 'expenses' need to be added to the cost base of the property, rather than deducted immediately.

        • darkchoc on 26/10/2016 - 22:00
          +1

          @sp00ker: it sounds like OP has not completed a tax return yet.

          If course they would do it properly as it's their reputation on the line and rules to follow.

          OP sounds like they had dinner advice but didn't fully understand it.

          Having the property split 50/50 is a good option for lots of reasons.

          One years scenario and incorrectly understood does not make the set up bad.

          There is never the perfect solution

  • [Deactivated] on 25/10/2016 - 08:15
    +9

    Items 1, 2, 3 are definitely not deductible expenses. They form part of the capital cost of purchasing the property. Also the mortgage establishment fee, if over $100, is deductible over five years. Has your second Tax Agent really advised you otherwise?

    • oliman on 25/10/2016 - 12:01

      Thanks for the info.

    • itbargainhunter on 25/10/2016 - 16:06
      +3

      Sounds like his second tax agent is not even qualified.

  • CheapskateQueen on 25/10/2016 - 08:25
    +7

    Gees.

    Ppl are correct.

    The following are not deductible. They go to cost base of your asset:

    • The stamp duty after the purchase (around 8k)
      -property insurance fee
    • conveyance fee

    The following are "borrowing expenses" which are spread over 5 years:

    2) Land title fee
    4) mortgage setup fee

    So you may in fact be positively geared.
    In any event, you'll be positively geared eventually. Any excess loss your wife has will carry forward and eventually be used to offset any income when the property is positively geared.

    Also GEES. why is it fair to spread the income but not the loss?

    • oliman on 25/10/2016 - 12:03

      The legislation says>> If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums.

      So in my case, insurance premium was tax deductible.

      • CheapskateQueen on 25/10/2016 - 12:46

        no such thing as joint tax returns in Australia, so you always file separately.

        Also Lender's Mortgage Insurance is not deductible. Period. If there is some other strange insurance premium charged in states other than NSW that i don't know about well there you go. learn something new every day.

    • lasertip on 25/10/2016 - 12:07

      You want the tax benefits but not the tax costs of your arrangement- that's not how it works.
      Every arrangement has upsides and downsides- your advisor should have pointed them out and left the decision to you.

      Tax laws are a mess. Foreword to Australian Taxation Law 26th ed (Woellner, Barkoczy, Murphy, Evans, Pinto):

      The legislation is in some cases unintelligible: without a commerce or law degree the ordinary taxpayer stands no chance of finding his way through the morass and even with these qualifications his advisers will of necessity have to struggle to make sense of language that is convoluted as it is confusing … Many provisions in the legislation are not applied for the simple reason that no one is able to comprehend them.

      Moral of the story? Get a better tax advisor.

    • oliman on 25/10/2016 - 12:09
      -1

      [QUOTE]Also GEES. why is it fair to spread the income but not the loss?[\QUOTE]

      No that is not what I said.

      I wanted both income and expenses split 50/50 (and that is what I did with my and my wife's tax return few days back)

  • Realsteel on 25/10/2016 - 08:25
    +1

    I am not sure how much of the mortgage you have left to pay but once the property is "positively geared" in that you have assessable income, you wouldn't be complaining. Also if the wife starts working in the near future, she will be able to reduce her assessable income and pay less taxes with the deductions from the property.

    Also, you might want to ask your Tax Agent on the tax losses she is generating. She might be able to offset this against future income. Not a tax expert so please check with your accountant. There might be a chance she can carry forward the losses and offset against future income.

    From where i see, all is not lost. You are looking at it from a short term view. In the long run, there are still benefits to be realised.

    • oliman on 25/10/2016 - 12:14

      Thank you for the direction. I will take more advise and clarify if my wife's last ear tax return expenses can be claimed in future against her income.

  • tomleonhart on 25/10/2016 - 11:36

    Any comments?

    Yup, totally fair.

  • CLoSeR on 25/10/2016 - 12:38
    +1

    It's 50/50, you can't claim any more than 50% of the expenses. ATO has some examples, it's pretty cut and dry.

  • JetLi on 25/10/2016 - 13:01
    -1

    It sounds like you got bad advice from both tax agent 1 and 2, good learning experience.

    • oliman on 25/10/2016 - 13:16

      How do you find a 'Good' tax agent then?

      • JetLi on 25/10/2016 - 13:40

        a tax agent doesn't have to be a certified/chartered accountant (i.e. CPA or CA), I would go to a tax agent who is also a certified/chartered accountant.

      • garetz on 25/10/2016 - 13:52
        +2

        there are no good tax agents, there are only competent ones, and even then you should always do your own research and base your decisions on an educated self.

  • ef on 25/10/2016 - 13:32

    I don't think you can claim an investment property loss (negative geared) as a loss; as the rental income is added/deducted from your income and not investment section of tax return(where shares/ business profit/loss is calculated). The profit/loss of the investment section of tax return can be carried over I think it was 7years.

    Your arrangement is good for a positive geared property as the positive income should be under the tax free threshold for your wife, so you save on income tax for her portion.

    Your expenses don't include a depreciation schedule, if your property is newish you could decrease your positive geared income with depreciation costs.

  • mrstan on 25/10/2016 - 17:51
    +2

    I just want to clarify this for you, as almost everyone here has mentioned most of those expenses are non deductible, they're not going to be incorporated into your rental schedule for your 2016 tax return. They are capital costs/borrowing costs and are factored into the cost base of the property or amortised.

    Both accountants have not given you incorrect information, I am unsure why people are saying they have.

    THe first one has provided an estimate, the estimate is as good as the information they are working with, I think it is reasonable.

    Second accountant has said both income and expenses are split, which is correct. But again you have not considered those big ticket expenses you have listed are capital.

    Putting the property in both you and your wifes name depends on our financial situation. Obviously if its going to be positively geared and youe wife is not earning income then 100% in her name. But at the same time, when it starts to be negatively geared (most often the case in the first few years of an average dwelling) you want to take advantage of the tax break.

    Also look into getting a depreciation schedule drawn up, might actually push it into negatively geared.

    So yes, the information given to you is reliable, and putting it 50/50 is not the end of the world.

  • mchoodie on 25/10/2016 - 18:23

    Take advantage of your wives tax free threshold? If 50% of your "deductions" are greater than 50% your income, particularly over 10 years, then there is a bigger problem than the tax advice you received!

  • Typical16-bitEnjoyer on 25/10/2016 - 18:54

    Get your wife to work? Win/win scenario

    • oliman on 25/10/2016 - 20:35

      Yes I will do this now so she can carry the tax loss from recent tax return in future income tax.

  • Findmebargain on 25/10/2016 - 20:43

    Dont forget claiming the fees you paid to your first tax agent for the advice given to you, and that you should be able to claim 100% in your tax return.

    • oliman on 25/10/2016 - 20:47

      Thanks. Yes I did claimed that.

  • [Deactivated] on 25/10/2016 - 22:35

    This is one of the foundations of the property boom. Well intentioned investors like the OP who buy property without fully understanding the tax implications. Sure there are people who do the sums and understand how an investment property will impact on their income and tax, but it doesn't count for much if someone with a limited understanding bids up the property for sale.

    Oliman, i'm glad the ozbargain hivemind could give you some decent advice and some tips for managing the property in the future.

  • True Bargains on 25/10/2016 - 23:22
    +1

    Your wife and can carry forward a loss to future years when she does have an income.

    • cmafra on 26/10/2016 - 09:53

      this ^^^^^ one day if your wife works and pays income she can offset against this loss. the system is fair in that way.

    • oliman on 26/10/2016 - 11:17

      Can she also forward/offset the loss on her portion of CGT when we sale the property in the future?

      • cmafra on 26/10/2016 - 12:11

        yes. all costs related to the property and all gains will be offset on each other, and if it is a loss it can be carried forward forever. Keep your receipts always!

        • edgar28 on 26/10/2016 - 14:16
          +1

          Extracted from ATO

          You can't deduct a net capital loss directly from your income, but you can carry it forward and deduct it from capital gains in later income years.

          There is no time limit on how long you can carry forward a net capital loss.

          You must offset your capital losses against your capital gains in the order in which you made them. You can't choose not to offset capital losses against capital gains if you have them, but you can choose which capital gains to deduct your losses from.

          Net losses from collectables can only be deducted from capital gains made from collectables, not from other capital gains.

        • lasertip on 26/10/2016 - 15:41

          Yup, net capital losses can ONLY be set-off against future capital gains (s 102-15 ITAA 1997)
          Although the ATO may not consider some of your property expenses as capital expenditure, they may be deductible amounts, etc.

          IMO, a good/competent tax adviser is one who knows the tax laws and is experienced, in the area that I'm seeking advice on, because tax is a very large field and most professionals specialise in certain areas (in this case property income and CGT for individuals). Even then, I'd ask for their reasoning and do my own research before acting on their advice.

          If you're interested in your own research, I find that this book is a good starting point because of the clear explanation.
          http://legal.thomsonreuters.com.au/principles-of-taxation-la…

  • edgar28 on 26/10/2016 - 14:14

    Did you declare in your purchase contract that she owns 50% of it? or just sharing in name?

    • oliman on 26/10/2016 - 14:21

      Just sharing the name. The percentage of share is not mentioned anywhere.

      • darkchoc on 26/10/2016 - 22:01
        +1

        That means joint owned. It's 50/50.

  • Typical16-bitEnjoyer on 26/10/2016 - 15:08
    +1

    Need to be on title as tenants in common to have a fixed undivided share

  • thirtysixd on 26/10/2016 - 15:13

    I am lost

    Most of those costs are capital and not deductible…
    But if your wife is recording a loss then property is most likely not positively geared?

  • darkchoc on 26/10/2016 - 22:12
    +1

    OP… Based on your comments, it appears that you have not completed a tax return for the property and you have not fully understood everything that the tax agents have told you. This is not a bad thing. It just means you need to go through a tax return for you and your partner to understand how it all works.

    It's great to have a positively geared investment and in future years, it will hopefully give you a good return and some long term capital gains.

    Given the information you have provided us and your general understanding, the set up you have on the face of it is suitable and reasonable. It allows profits to be split 2 ways (50:50 between you and your partner) and may reduce the income going into higher tax bracket in the future. It will also allow you to split any losses and have a reduction in tax.

    In the long term, you will expect to make a profit ( you mention the intention is to hold the property for a long time), so at this point in time, it is sensible to use 2 people's tax thresholds.

    If it makes losses for over 10 years, then you've got bigger issues than the tax deductibility of losses.

    Overall, you'll be alright.

    And congratulations on being a fellow investment property owner! I'm learning a lot from my venture too.

    • darkchoc on 26/10/2016 - 22:14

      I just read that you've already lodged the return. Ask your tax agent if you can defer the investment losses for your wife's return until she is earning.

  • lolmao on 26/10/2016 - 23:52

    As everyone else said, the stamp duty etc is not tax deductible (goes onto cost base).

    Also you are not losing out, your wife can carry the loss forward until the property is making a profit then she can deduct previous losses against the income. and when it does make income you will benefit because of her paying less tax with the tax free threshold.

  • BlackForest on 27/10/2016 - 00:33
    +1

    a) a tax agent can only provide advice based on information given to him/her at the time, hence, depending on what you've told them their advice may have been correct or incorrect but either way, there is no point in trying to blame either one of them unless you have their advice and the information provided to them in writing

    b) you have to understand the basics first - as some here mentioned already, not all expenses can be claimed straight away - you have to differentiate between
    1) capital expenses (purchase price, solicitor/conveyancer, stamp duty etc.) which cannot be offset against your rental income but instead can be offset against your (hopefully) future capital gain
    2) borrowing expenses (title searches, mortgage insurance, mortgage broker) which can be claimed over the first 5 years unless you refinance (in that case the remainder can be claimed straight away) and that portion can be offset against your rental income
    3) running costs (council, strata, water, real estate fees, repairs, landlord/building insurance, interest on borrowings etc.) which can be claimed in full against your rental income
    4) (I call them) "expenses on paper" which would be a depreciation from a certified quantity surveyor as even though you didn't build the property, you are still able to claim depreciation on the building structure/renovations (deductible over 40 years) and other capital items (e.g. hot water system, blinds, stove, cook top etc.) which can be claimed usually between 1-12 years - very important here to check whether to use the diminishing or prime cost method, depending on what your plans are

    c) make the best out of your situation now

    If your wife has no other taxable income, all losses incurred from the rental property will be carried forward till she ends up with a positive taxable income (doesn't matter where from - CG, business, PAYG, interest) as the loss is not a Capital Loss, but instead a tax loss and will have to be offset against ANY future taxable income, regardless if her income is below the threshold anyway or not.
    In order to make the best use of that carried forward loss, you can do two things:
    1) make sure that when she starts working again she starts working as early in the financial year as possible to have as much income as possible in a higher tax bracket
    2) or you sell the property BEFORE the financial year when she starts working again if you can see that there is a gain as that carried forward tax loss can also be used to offset against any gain made on the sale of the property. Just make sure you hang on to the property for more than 12 months in order to get the 50% discount.
    It all depends on the exact figures but it could eventually turn into a big advantage to have it split 50/50.

    The smartest thing would have been - if that was an option and you didn't have another property in your name - you buy the property, move in for the first 6 months, rent it for up to 6 years and before the 6 years are over - and if you don't have another property in your name - you can then sell it and you don't pay any CG at all as it can still be deemed to be your principle place of residence. Or you move back in for another 6 months and you can then rent it again. But that's a different story lol

    • retiredfeline on 27/10/2016 - 04:28

      I keep reading posted advice to live in a new primary residence for the first 6 months. Where does this come from? The only connection I could find is the first home owner grant.

      • BlackForest on 27/10/2016 - 08:07

        https://www.ato.gov.au/General/Capital-gains-tax/In-detail/R…

        But keep in mind that it only works if you don't have another property in your name for a period of more than 6 months, otherwise you'd miss out on the main residence exemption.

        Instead, if you are looking into buying a family home as well as an investment property, get the investment property first, move in for 6 months at least, then buy the family home and move into that. As long as you sell the investment property within 6 years (or alternatively move into the investment property before the 6 years are over and then rent it again for up to 6 years) you can sell it and still deem it as your principle place of residence, hence no CG.
        However, it means that you will be liable to pay CG once you dispose the family home. With that one though you can wait till you retire and make use of your low income/marginal tax rate or it gets passed on to your kids as part of the estate.

    • oliman on 27/10/2016 - 12:48

      I really appreciate you details insight about the situation and the options. A big THANK YOU for spending time on writing this.

  • AMLagonda on 27/10/2016 - 02:37

    hmmm I didn't think of this either…. But in saying that ours is for very long term (20+ years) so Im not too worried.

  • daleyboy79 on 27/10/2016 - 11:16

    A lot of those fees are one off involved with the purchase, hence making your deductions for the first year much higher, think about the following years…

  • ca4cpa on 27/10/2016 - 11:52

    Hey,

    You should buy property in both name - it was correct advise that I should give to my client. If you are thinking long term.

    In short term; yes - you have not gain 100% of your deductible offset

    But in long term : when you will have double the price of property - you are not paying 47% tax on Capital Gain. Or if you subdivide and sale a few property this year and a few property next year. You are splitting your income.

    The new accountant tried to get smart to show you how clever he is… LOL

  • JetLi on 27/10/2016 - 15:16

    Just hope you are not in a situation whereby you 1) forced to sell earlier than expected and the property has not appreciated as expected or 2) your wife only works part time and has low taxable income, in both those situations, you would have been much better off buying it in your name only.

    • oliman on 27/10/2016 - 15:47

      The property that I have bought is in Morwell and it is a 3 units on one large block of land under single title. Morwell is regional area and property appreciation is slow in this suburb, but I am planning to keep the property for a long period of time (around 10 years). Also, I managed to buy the property for a bit lesser than what it actually worth because it was bought from a friend without involving any agents and we negotiated on a price.

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