If you have been keeping up with real estate talk, you will probably have heard the term “decoupling” when in comes to residential property investment. Frequently, it has been mooted as a way to avoid paying the hefty stamp duty – additional buyer’s stamp duty – levied on Singaporeans who are buying their second residential property in the country.
1. What is the decoupling strategy?
Part-purchase, fractional purchase or decoupling is where a joint owner of a residential property either as joint tenants or tenants-in-common transfers his/her own respective share of the property to the other joint owner, relinquishing his/her ownership completely.
2. How does decoupling work?
In the case of a married couple who owns 1 residential property together, the husband may sell his share in the property to his wife. After doing so, the wife would own 100% of the property. As the husband now no longer owns any residential property, he can proceed to purchase another residential property in his own name as his first property without incurring Additional Buyer’s Stamp Duty (ABSD).
This process involves entering into a legally binding contract between husband and wife to buy up all remaining shares of the property. The terms of the contract would be drafted by a lawyer and contained in the Sale and Purchase Agreement which would be executed by both joint owners, husband and wife. The Sale and Purchase Agreement would usually specify four main points:
- The property’s address;
- The share in the property being transferred/sold;
- The corresponding price of that share being transferred; and
- The parties involved.
3. What are the costs involved in decoupling? Is decoupling always less costly than paying ABSD?
When doing a decoupling, the potential tax savings can be substantial. In most situations decoupling would be less costly than the potential ABSD which purchasers may be hit with (e.g., 17 per cent ABSD for a Singapore Citizen purchasing a 2nd property). However, there are three main points that purchasers should be aware of and carefully consider when deciding to engage in a decoupling exercise.
- If the purchasers have used money from their Central Provident Fund (CPF) to buy the property, the outgoing party would have to refund this sum plus accrued interest when the outgoing party sells the share to the spouse or to the other co-owner. Although this sum of money which goes back into the CPF Ordinary Account can be used towards the purchase of the subsequent property, they would still need to have enough cash to make the refund in the first place.
Take for example a husband and wife who jointly own a property where the wife holds 1 per cent and has used $200,000 from her CPF account. Assuming the property today is valued at $1 million and they decide to decouple. Husband and wife would have to enter into a contract to buy and sell 1 per cent share of the property respectively. The wife would sell her 1 per cent share at the price of only S$10,000. However, she would have to top up S$200,000 in cash plus interest in order to refund the money into her CPF Ordinary Account.
- In addition, if there is an existing bank loan on the existing property, the remaining owner must be able to finance this loan by him or herself. The loan would have to be restructured to be in the sole name of the remaining owner. Therefore, prudent financial planning is vital and parties should look into whether their respective incomes would allow them to actually own properties individually. There are also other considerations to take note of based on our current financing regime such as the Total Debt Servicing Ratio and Loan-to-Value criteria.
- Legal fees would also be a cost (though relatively small one) when engaging in a decoupling exercise as both purchaser and seller would have to get separate legal representation, they would each inevitably incur a set of legal fees respectively. The fees could range around $6,000 – inclusive of fees for the seller and the buyer.
4. What are the key risks a couple needs to know about decoupling?
Before we discuss the risks of decoupling, in property ownership, it is prudent for all owners to think about succession planning especially so if the owners choose to hold their property in grossly unequal shares of 99 and 1 per cent or even in equal shares of 50 per cent each. This is to ensure that their assets will be distributed in accordance to their specific wishes. Even if couples are married, there is a risk of dispute on who actually contributed more to the property (both financial contribution and non-financial contribution).
After decoupling, there is also a good likelihood that another property would be bought and couples will more likely than not own two different properties of differing values. In some scenarios, the difference in value of the two properties could be very large and there may be a scenario where only one party has been making contributions towards the upkeep of both properties.
5. In the unfortunate event of a separation/divorce, what are some potential disputes that may arise from property ownership assuming the couple had adopted the decoupling strategy in their real estate investment?
After a decoupling exercise, only one spouse would be the sole owner of the property. The spouse who had sold his/her share to the other spouse would technically be left without a property in his/her name. In the unfortunate event of a divorce, it would be for the spouse who had sold his/her share in the property to show and to prove that he/she is indeed entitled to some interest in the property.
Being safe and prudent in financial planning and succession planning is always worthwhile when dealing with real estate.
This article first appeared in www.Propnex.com