Investment properties have become a popular way for many Australian couples to save for retirement. But what happens to this property in the unfortunate event of a divorce?
Many Australian couples acquire investment property because it is a practical and lucrative way to save for retirement. However, marriage does not always follow the right path – and sometimes, married couples face unforeseen and unhappy events that cause irreparable damage to their relationship.
What happens to a couple's real estate investment when their marriage ends in separation or divorce?
Ian Shann, Senior Mediator and Director of Perth-based Move On Mediation Family Dispute Resolution Services, defines three options and explains the tax considerations that may arise.
First option: keep the investment property
Couples can choose to continue with co-ownership – a decision that can provide several benefits, according to Shann.
"Unless you provide otherwise by a family court consent order, you will still be responsible for your share of the property expenses, while being entitled to your share profits, "he says. "You could have an equal interest in the property (as roommates) or you could have different interests as joint tenants, for example like 60%: 40% or 75%: 25%. It will depend on how you bought the property. »
Shann adds that keeping the co-ownership could delay the payment of the capital gains tax (CGT) up to a point.
"The CGT could be deferred until the property is sold – but, if necessary, it will have to be paid at some point," he said. "You may [also] be liable for stamp duty if you change owners without making a consent order in family court."
Second option: sell the investment property
Shann says it is the simplest solution for some couples going through a divorce because it breaks the financial ties created by a jointly owned asset. But the sale of the property "would likely trigger the CGT – and any gain would be taxable or the losses credited to future capital gains".
"The best thing you can do is keep the lines of communication open between you to frankly discuss potential scenarios if you want to sell the property," he says. "Consulting with a licensed tax practitioner and / or financial advisor can help you decide the best way to proceed. These issues can also be discussed during your divorce mediation to help you reach a fair and friendly settlement in your divorce cases. »
Third option: transfer the property to the other party
Shann says that another option is to transfer his share of ownership to the other party. He adds that this is also "a GCT trigger event", but a rollover generally applies under certain rules.
"You may be eligible for a CGT liability rollover if the property is transferred to a party in accordance with family court orders," he said. “The responsibility (or loss) of the CGT is transferred to the party which transferred the property to it. Consequently, the spouse who owns the asset will be entirely responsible for the CGT on any gain (or will keep any credit for loss) when he decides to sell it. »
Shann also suggests checking the Australian Taxation Office (ATO) website for more information on agreements where deferrals are applicable.
However, he warns that the options he has presented should "not be considered independent financial advice", adding that "all questions regarding the financial implications of asset sharing at following a separation or divorce should be referred to a financial professional who can advise you on your particular situation. "
The importance of reaching an agreement
Shann says the goal of her business is "to help separated couples get out of family court and minimize the need for lawyers, save time, money and stress" .
"It is generally in your interest to reach an agreement with your ex-court ex. The easiest way to do this is through divorce mediation, "he says. "It allows you to sit in a neutral place, with an independent third party who can help you discuss the issues and decide for yourself how to resolve the issues resulting from your separation and divorce."
Shann says that agreements reached during mediation can often be documented and adds "this can then form the basis for legally binding and enforceable agreements such as consent orders".
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