Investment properties have become a popular way for many Australian couples to save towards their retirement. But what happens to that property in the unfortunate event of a divorce?
Many Australian couples acquire investment properties because they present a practical and lucrative way to save for retirement. However, marriage doesn’t always follow a smooth path – and sometimes, married couples encounter unforeseen and unfortunate events that cause irreparable damage to their relationship.
So, what happens to a couple’s jointly owned property investment when their marriage ends in a separation or divorce?
Ian Shann, principal mediator and director of Perth-based family dispute resolution service company Move On Mediation, lays down three options and explains tax considerations that may arise.
Option one: Retain the investment property
Couples can choose to continue with the joint ownership – a decision that can provide several benefits, according to Shann.
“Unless you provide otherwise by way of Consent Orders in the Family Court, you would still be liable for your share of the expenses of the property, as well as being entitled to your share of the profits,” he says. “You might hold an equal interest in the property (as joint tenants) or you might have different interests as tenants-in-common, e.g. as 60%:40% or 75%:25%. This will depend upon how you purchased the property.”
Shann adds that retaining joint ownership could hold off the payment of capital gains tax (CGT) up to a certain point.
“CGT might be deferred until the property is sold – but, if applicable, it will have to be paid at some point,” he says. “You might [also] be liable for stamp duty if you change the ownership without entering into Consent Orders in the Family Court.”
Option two: Sell the investment property
Shann says this is the simplest solution for some divorcing couples as it severs the financial ties that a jointly owned asset creates. But selling the property would also “likely trigger CGT – and any gains would be taxable, or losses credited against future capital gains.”
“The best thing you can do is keep the lines of communication open between you to candidly discuss the potential scenarios if you are to sell the property,” he says. “Consulting a registered tax practitioner and/or financial adviser can help you decide on the best way to proceed. These matters can be discussed during your divorce mediation as well to help you come to a fair resolution amicably as part of your divorce matters.”
Option three: Transfer ownership to the other party
Shann says another option is to transfer one’s share of ownership to the other party. He adds that this is also “a GCT triggering event,” but a rollover generally applies under certain rules.
“You may qualify for a rollover of the CGT liability if the property is transferred to a party pursuant to Family Court Orders,” he says. “The CGT liability (or loss) is carried forward to the party who has the property transferred to them. As a result, the spouse who owns the asset will be entirely responsible for CGT on any gain (or retain any credits for loss) when they decide to sell it.”
Shann also suggests checking the Australian Taxation Office’s (ATO) website to understand more about agreements where rollovers are applicable.
However, he cautions that the options he presented should “not be taken as independent financial advice,” adding that “all matters regarding the financial implications of division of assets following a separation or divorce should be referred to a financial professional who can advise on your own particular circumstances.”
The importance of reaching an agreement
Shann says his company’s goal is to “help keep separated couples out of the Family Court and minimise the need for lawyers, saving time, money, and stress.”
“It is usually in your best interest to reach an agreement with your ex out of court. The simplest way to do this is via divorce mediation,” he says. “This allows you to sit down in a neutral place, with an independent third party who can help you discuss matters and decide yourselves how to settle the matters arising as a result of your separation and divorce.”
Shann says agreements reached at mediation can often be documented and adds “this can then form the basis for legally binding and enforceable agreements such as Consent Orders.”