30 Apr Who gets the investment property? Navigating property portfolio settlements in a divorce
Property has historically been a strong investment option in Australia. And in recent years, Queensland, particularly Brisbane, the Sunshine Coast and the Gold Coast, but even far more broadly, has had strong price growth.
These factors mean that more investment properties than ever are making their way into a couple’s portfolio. Recent ATO-based figures indicate that around 20% of individual taxpayers own at least one investment property.
But when it comes to property settlement after divorce or separation, having an investment property – or even a property portfolio – involved can make things a little more complicated.
These kinds of investments are often tied to high-value property settlements of high-net-worth individuals, as they are very common in long-term financial plans, as well as tax and future wealth-building strategies. So, deciding who keeps them – or whether they should be sold – requires a careful look at not just family law requirements around property settlement, but also the legal and tax ramifications.
What happens to investment properties in a property settlement?
A common misconception is that an investment property will simply go to the person who purchased it, managed it or contributed the most to it financially or otherwise. However, when it comes to property settlement in Queensland, there’s no automatic answer about who gets an investment property.
Under the Family Law Act 1975 (Cth), property settlements are based on what is ‘just and equitable’. This means that the Court won’t look at the assets in isolation, but will consider the entire asset pool and how that should be divided overall. Your investment property, or properties, are just a piece of that puzzle.
Determining an equitable distribution
To determine an equitable distribution of property generally, the Court will consider different factors. Some of these are:
- The length of the relationship
- The financial resources and earning capacity of each party
- The future needs of each party
- The childcare responsibilities of each party
- Age and health of each party
- Any impacts from family violence
While you don’t always have to seek consent orders from the Court to finalise your property settlement, if you do, the Court will review all the financial and other documentation available, such as bank statements and property valuations, to make sure that they are dividing the property fairly.
Tax and financial considerations
Investment properties also come with additional financial layers that need to be considered during settlement.
- CGT, particularly where a property is sold or transferred
- The availability of rollover relief in certain circumstances
- Rental income and how it’s treated
- Ongoing costs such as maintenance, rates and insurance.
Understanding the true financial position means looking beyond the ‘value’ of the property and considering the real-world impact over time. The Court will also take into account taxes, holding costs, and future liabilities when determining how to divide the properties fairly.
Family lawyers are a vital part of this process, but we also work in conjunction with financial and tax advisors. These specialists help you identify and evaluate your assets and liabilities to ensure a fair distribution of assets.
Investment properties held in companies and trusts
Investment properties aren’t always held in one or both parties’ personal names. In higher-value property settlements, they’re more often than not held in a company, family trust, unit trust or other structure.
This can make the property settlement more complex. That’s because with these types of structures the question goes beyond ‘who owns the property’ and looks to ‘who controls the structure that owns the property?’ And it can sometimes be tricky to figure out who actually has control.
To find an answer to this, the Court may need to consider things like who has direct ownership, what other beneficial interests are in place, who has control of the trust or company, whose name is on loan accounts, where distributions go, who covers the tax obligations and the practical ability of either party to access or retain the asset. This will help the Court determine whether or not an asset should be included in the property settlement.
Regardless of how the investment property is held, there are still options for resolving the property settlement. The right approach will depend on the structure, the broader asset pool and what outcome is fair, practical and financially workable.
Property settlement options
One party retains the property
In many cases, one party will want to keep the investment property. If it’s held as a joint tenancy then they will usually ‘buy the other party out’ by giving them assets that are of equivalent value to the portion of the property that aligns with an equitable division.
This doesn’t always mean handing over cash. It could involve offsetting the property against superannuation or allocating other assets instead.
If there is a mortgage on the property, however, and the party who wants to retain the property can’t purchase it outright, they must be able to refinance the loan into their sole name. If the loan remains joint then both parties could remain liable for the property payments and other financial obligations even after they’re separated.
The property is sold
Sometimes, selling the property is the most practical option. This might be necessary where neither party can afford to buy out the other or take over the mortgage, or where there are insufficient assets to balance the division. Once the property is sold, the net proceeds are then divided according to the agreed or ordered settlement.
Sometimes a separating couple might decide to take this approach even if one or both of the parties can afford to take over the property. That’s because it provides a clean financial and even emotional break from the relationship.
The property is transferred
Instead of selling the property might also be transferred from one party to the other as part of the overall settlement process. This can be a good option when one party wants to retain the property.
A property transfer needs to be discussed with your legal, tax and financial advisors; however, because the way that this is structured matters. Capital gains tax (CGT) may apply to the transfer, potentially resulting in a substantial tax liability in some circumstances.
If you are required to pay CGT, rollover relief might also be available where the transfer occurs under properly formalised arrangements such as a court order or a binding financial agreement. Rollover relief is simply when CGT is deferred because assets are transferred between spouses (or former spouses) as a result of a court order, maintenance agreement, or binding financial agreement under the Family Law Act.
Without the right legal structure, however, the financial outcome may be very different from what you intended.
Continued co-ownership
Sometimes, though we don’t see this often, the parties might agree to retain joint ownership of the investment property either for the long term, or for a set period of time. Usually, this is due to outside factors, such as market conditions that are unfavourable for a sale, or where there are other strategic reasons to delay the sale or transfer of the property.
If you’re considering this option, note that this approach can carry ongoing risk. Both parties remain responsible for any obligations or liabilities connected with the property, and disagreements could arise around rental income, maintenance or when the property should ultimately be sold.
Because of this, we typically only recommend co-ownership where both parties are highly committed to cooperating, and there are clear legal agreements in place.
Multiple investment properties
When multiple investment properties are involved, their division can become even more complex. If you need to go to the Court for settlement orders, the Court will typically consider all the properties as a single portfolio and in light of the overall financial position.
In this case, they might allocate different properties to each party, or even sell some properties but allow the parties to retain others. However, these decisions will always be focused on creating a fair and equitable result.
Formalising the agreement
While we often talk in terms of what the Court will look at in a property settlement, most are actually done without the Court’s involvement through binding financial agreements (BFAs). However, any agreement about an investment property should take into account the same factors that a Court would in order to ensure that all the parties are treated fair and equitably.
In addition, any agreement about an investment property should be legally formalised with the help of your family lawyer. This will ensure it’s both enforceable and structured to give you the most protection and benefit possible. Formalising the arrangement not only provides you with certainty about the financial outcome but also protects you against future disputes.
Timing matters… and so does getting the right advice
The timing of any property settlement can influence the outcome. Market conditions, interest rates and lending capacity can all impact whether a party is able to retain an investment property or a sale is more appropriate.
If you’re navigating a separation or divorce involving investment properties or a broader portfolio, particularly as a high-net-worth individual, get in touch. Our team is on hand to give you clear advice and guidance that’s specific to your unique situation and can help guide you to a smarter and less costly divorce.
Do you need support managing a property settlement or protecting your rights during divorce? As family law and divorce specialists, Toomey Family Law can help. Get in touch today.