Changing Property Ownership

Making changes to the way you own property can be an expensive exercise but sometimes changes in our life require it. Here we weigh up the pros and cons. Stuart Wemyss

Direct property is an expensive asset to buy and sell. The entry costs often amount to around five to six per cent and the exit costs about half that amount. Knowing this, you don’t want to get your ownership structure wrong, because it can end up being an expensive mistake.

It may cost you a lot of money to fix the mistake and maybe even more if you decide not to fix it. The problem, however, is that things are always changing in our lives and as such, we may need to change how we own our investments.

This begs the question, is it worth changing the ownership of property?

Options aplenty

There are many ways to own property. Firstly, you can hold property in your sole name or own it with other parties. If you own property with other parties, you can hold it as joint tenants (i.e. where there’s no specific ownership percentages) or tenants in common (where you can stipulate each party’s interest). Do you put the property in the highest income earner’s name to maximise gearing benefits? Do you share the ownership between high and low income earners to spread the capital gain and income tax liabilities that will eventuate in time? These are some of the questions we find ourselves asking when we contemplate an investment property purchase.

Secondly, we can hold property in a trust. There are three types of trusts, being discretionary, unit and hybrid. Discretionary trusts are probably the most popular (often referred to as family trusts).

Thirdly, we can own property in a company – this is rarely a good structure for investors.

And finally, and recently becoming more popular due to new borrowings rules, you can hold property in a self-managed super fund.

As you can see, there are plenty of choices. Each ownership structure has its pros and cons and no one structure is perfect.

Why do people want to change?

When choosing the most appropriate ownership structure for our investments, we need to weigh up many considerations including immediate tax benefits (negative gearing), future tax liabilities (when the property produces taxable net income), future capital gains tax liabilities, asset protection, estate planning, retirement strategies, managing exposure to investment risk – and the list goes on.

Sometimes, when selecting an ownership structure, we can neglect to weigh up all these issues carefully, which results in a largely ‘incorrect’ decision. Other times, things can change quite substantially in our lives, which renders past ownership structuring decisions suboptimal or inefficient.

Since property is a long-term investment it stands to reason that many people will, at some point, consider changing the ownership structure of property they own for one reason or another.
Another common reason for considering changing a property’s ownership structure is to change the gearing level of the property. That is, if you own a property worth $400,000 with an investment loan for $50,000, you can’t simply decide to just increase the loan to say 80 per cent ($320,000) and claim a higher interest deduction on the higher loan amount associated with that property. The Australia Tax Office (ATO) will focus on what the additional funds ($320,000 versus $50,000) were used for to determine if they’re tax deductible. Once a loan is repaid, it’s gone forever from a taxation perspective. The only way you can increase a tax deductible loan is if you use the equity to invest in other assets (eg. another property or some shares), or if you change the ownership of the property (by selling part or all of the property to another person or structure).

The cost of change

It can be very costly to change the ownership of a property. Some of these costs include:

Stamp duty. To change the ownership of a property, you need to lodge a stamped Transfer of Land with the Titles Office in the state the property is located. Therefore, the Transfer of Land must be stamped by the State Revenue Office (each state’s office name varies a little from this). The revenue office will levy stamp duty based on the current market value of the land. The market value is often determined by obtaining a sworn valuation – particularly where a sale between related (associated) parties occurs. Stamp duty can cost in the range of three to 5.5 per cent of the current market value of the property (depending on the value and the state). Victoria allows married and de facto partners to transfer property between each other without incurring stamp duty (as long as no third party will benefit from the transfer).

Capital gains tax. Selling a property or transferring ownership triggers a capital gains tax (CGT) event (‘event A1’). If the sale (transfer) involves a primary place of residence, then no CGT should apply. However, if the sale involves an investment property, then the vendor will need to pay CGT on the difference between the cost base of the asset and its market value at the time of sale. Assuming the property is owned by individuals or a trust for more than 12 months, a ‘quick and dirty’ rule of thumb of estimating the CGT liability is to calculate 25 per cent of the capital gain. For example, if an investor purchased an investment property five years ago for a total cost of $315,000 (including stamp duty) and its current value today is $500,000, the CGT will be about $46,000 ([$500,000 – $315,000] x 25 per cent). In some cases, CGT can be quite prohibitive and cause investors to immediately disregard the idea of changing the ownership of a property.

 Loans. When you sell or transfer a property, you’ll need to change the loans used to finance that property. This may trigger additional loan entry and exit fees, particularly if you have fixed rate loans. While it’s likely these will be immaterial compared to stamp duty and CGT, they still need to be considered.
Legal, valuation and other fees. You’ll probably need to engage the services of a lawyer or conveyancer. This normally costs between $800 and $1500. You may also need to arrange a sworn valuation to determine or prove the current market value of the property. Most revenue offices will accept evidence other than a sworn valuation (such as some real estate agent letters including a shortlist of comparable property sales). You may also need to allow for professional adviser fees if you seek advice from your accountant or financial planner on the best way forward.

As can be seen, the exercise of changing the ownership of a property can be an expensive one. Therefore, it’s critical that you fully investigate and estimate all costs associated with this to ensure you make an educated decision.

Probably the best way to communicate the pros and cons of changing ownership is to look at some case studies.

Case study 1: changing ownership of previous residence

Brett and Lisa have occupied their home in Bondi for the past six years. During this time, they’ve worked hard and made many sacrifices to repay their non-tax deductible home loan. They now own the two-bedroom apartment outright. They estimate the apartment is worth $800,000. Brett and Lisa are planning to start a family and feel they’ll need to upgrade their accommodation. They’d like to retain their apartment as an investment property as they think it will make an excellent investment (it’s already performed well since Brett purchased it). They’ll need to spend about $1.4 million to buy a suitable home. They’re concerned about taking on too much non-deductible debt.
One option they have is for Brett to sell the Bondi apartment to Lisa (as it’s currently owned by just Brett). Lisa would borrow the total cost and Brett would use the $800,000 received from Lisa to reduce their home loan. They would incur stamp duty on the transfer, but no CGT would be payable, because it was their principal place of residence. Stamp duty will be $31,775.

The steps would be as follows:

1. Brett and Lisa purchase the new home for $1.4 million and borrow $1.463 million (i.e. cost plus stamp duty). This loan is secured by the Bondi property and the new home (loan-to-value ratio is 67 per cent).

2. Brett sells the Bondi property to Lisa.

3. Lisa borrows $832,000 and pays $800,000 to Brett and $32,000 to the Office of State Revenue.

4. Brett uses the $800,000 to reduce the home loan to $663,000.

5. In summary, Brett and Lisa have a home loan for $663,000 and an investment loan for $832,000 secured by the two properties.

Lisa is on the second highest marginal tax rate of 41.5 per cent (i.e. her taxable income is in the range of $80,000 to $180,000). She’ll save just under $15,000 in tax per year (through negative gearing the Bondi apartment). Therefore, it will take just over two years for the tax savings to fully offset the stamp duty costs.
However, from a cash flow perspective it’s even better, because they borrowed the cost of the stamp duty. Therefore, the cash flow cost is really only the interest on $32,000 – say $2200. Therefore, from a cash flow perspective, Brett and Lisa are nearly $13,000 better off after tax by re-gearing the apartment. If they use this extra cash flow to reduce their home loan, they’ll be miles in front.

Of course, Brett and Lisa could have sold the Bondi apartment and then just purchased a pure investment property. However, this would mean paying for selling costs and there would have been a period of time in which they weren’t invested in the property market. It’s always worthwhile hanging onto a good quality property.

Case study 2: Changing ownership when gearing benefits have evaporated

Justine and Richard purchased an investment property approximately eight years ago for $500,000. They put the investment property 100 per cent in Richard’s name as he was the highest income earner. However, the property has experienced a significant increase in value (now worth more than $1 million) and the property is nearly breaking even from a cash flow perspective (i.e. rental income pays for all interest and expenses). Therefore, Richard no longer enjoys any negative gearing tax benefits from this property. They’re wondering if it’s worthwhile to transfer the property into Justine’s name, as she’s not working and doesn’t earn any taxable income.

The table below sets out the results of my analysis over a 30-year period from purchase date. You’ll note that transferring the ownership after eight years does provide a larger after-tax cash flow. However, the net equity is lower due to the higher loan amount (loan was increased to pay for stamp duty and CGT when the property was transferred).

Leave in highest income earner’s name Change ownership after year 8 into lowest income earner’s name

Present value of after-tax cash flows from property over 30 years $360,000 $440,000
Present value of net equity in year 30 $3,524,000 $3,437,000
Total effect on net worth $3,884,000 $3,877,000

The above analysis suggests it’s not worth changing ownership in this situation (i.e. when an asset’s ownership structure becomes tax-inefficient) on an overall wealth basis. It would have produced a different result if the capital gain after eight years wasn’t as significant as it was (although if the investment property hadn’t increased in value, then you’d question if it’s worth retaining).

Another consideration is cash flow. To a lot of people, cash flow is more important than net assets – particularly in later years, when they rely on the after-tax rental income to fund retirement. Therefore, while the strategy might not be beneficial overall, it might suit some investors due to the stronger after-tax cash flow – $80,000 after tax is a lot of money in retirement.

Not for tax benefits

Part 4A of the tax legislation tells us that you risk contravening anti-tax avoidance rules if you enter into a scheme (transaction) with the sole or dominant aim of obtaining a tax benefit. Put differently, you must have a reason other than tax benefits for completing a transaction, or you could get in trouble with the ATO. There are many reasons why people change the ownership of property, such as asset protection, to own their home sooner, different personal risk tolerances and so on. Just be very clear on why you’re changing a property’s ownership and it might even be wise to document the same.


Often people disregard the thought of changing a property’s ownership structure if it means paying stamp duty and/or CGT. However, property is a long-term investment and it stands to reason that you should make long-term decisions.

Stuart Wemyss is a director of financial advisory firm ProSolution Private Clients and author of Smart Borrowers Handbook and The Property Puzzle, available from

By Eynas Brodie © Australian Property Investor magazine - Reproduced with permission.

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Posted by Susan991Report
Hi, Could anyone please advise of my current situation. I purchased a property in 1998, my accountant advised me to set it up in a form of a discretionary trust, in which at the time i was only 23 yrs old and did'nt know otherwise what i was getting in too.

the property has been my principle place of residence. I am thinking of selling however i understand companies and trusts have to pay capital gains.

Would CGT apply in my situation considering it wasnt an investment property.. Any info will be helpful please.

Posted by Report
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