Reader question: My wife and I are interested in buying an investment property. My wife makes $30k a year and I make $65k year. Is it better to buy the property just on my name for tax purposes or do it together with my wife?
This is a really tough decision and I don’t have enough information about you to guide you which way you should go but here are a few things to consider prior to making your choice.
In general I like having a property owned by both partners with 75% held in the name of the spouse on the higher tax bracket. But this can vary depending on your gearing and particular income levels, both now and in the future (when you ultimately sell the property). Whilst you obviously want to get the maximum tax benefits associated with negative gearing, you don’t want to do so at the detriment of having to pay back more in tax when it becomes positively geared or when you eventually sell the property.
If the property that you are looking at will be negatively geared, your marginal tax rate of 31.5% (including the 1.5% Medicare levy) makes it more beneficial for you to own the property in your name rather than in your wife’s name as she is on a lower tax bracket of 16.5% (up to $37,000). This means that for every $10,000 in deductions, you would get an extra $1,500 back as a tax refund if the property was held in your name rather than your wife’s.
Sounds like a no brainer til the rent increases, your mortgage balance reduces and the property starts making a profit. In this instance you will have to start paying back that extra 15% in tax each year. The dilemma increases further when you add capital gains tax (CGT) to the equation, particularly given the size that I have seen some houses increase in value by over the years.
For CGT calculation purposes, you will need to get the crystal ball out and think what marginal tax rate that you will both be on in the year that you sell. If your example, your wife has retired by the time you sell but you are still working then you definitely want to consider having the property in her name to minimise the possible CGT impact.
This article first appeared in the April 2012 issue of Your Investment Property Magazine www.yourinvestmentpropertymag.com.au. Copyright Key Media Pty Ltd 2012.