With the rising cost of property and the desire to enter the market sooner, co-ownership is becoming a practical option for Kiwis looking to buy their first home or invest. Whether it’s with a partner, family member, or even a close friend, this approach can help fast-track your property goals.
However, while co-ownership comes with plenty of advantages, it also brings its share of potential challenges. Because it’s a legally binding arrangement, you’ll need to be clear on your responsibilities and long-term commitment.
Let’s explore what co-ownership means in New Zealand and what you need to consider before jumping in.
The advantages and disadvantages
Co-ownership involves two or more people sharing ownership of a property. This approach is particularly popular with couples or individuals who want to enter the market sooner by sharing the financial burden.
To determine if it’s right for you, it’s important to weigh up the risks and rewards:
Advantages of co-ownership:
- Pool your savings with friends or whānau to buy a home or investment property sooner.
- Avoid needing a full deposit yourself.
- You can increase your borrowing power by combining incomes.
- Broader range of property options become available.
- Reduces living and transaction costs through shared responsibility.
Disadvantages of co-ownership:
- Relationships can be tested, and a falling-out may lead to costly consequences.
- Each co-owner is liable for the property’s mortgage, meaning you could be impacted if another co-owner falls behind on payments.
- Disagreements over costs or decisions can create tension.
- One co-owner might want to sell while others don’t, leading to complications.
- Your ability to borrow in the future may be reduced, as some lenders see the full co-ownership loan as your responsibility.
The legal aspects of co-ownership
Entering into co-ownership is more than just an informal agreement—it’s a legal relationship, requiring a formal co-ownership agreement. In New Zealand, the two main types of co-ownership are Tenancy in Common and Joint Tenancy.
Tenancy in common
This option allows two or more parties to own a property together but with the flexibility to have unequal shares. For example, three people might own a property with respective shares of 50 percent, 30 percent, and 20 percent. Importantly, in this arrangement, if one person wants to sell their share or passes away, their share doesn’t automatically go to the other owners—it can be sold or inherited.
Joint Tenancy
Joint Tenancy is most commonly used by couples. In this arrangement, each party has an equal share of the property. If one owner passes away, the surviving partner automatically becomes the sole owner of the property. However, if a relationship ends, this form of ownership can be converted to Tenancy in Common to allow more flexibility.
How to set up a co-ownership agreement
To ensure a smooth co-ownership process, follow these steps:
- Choose your ownership type: Decide between Tenancy in Common or Joint Tenancy based on your situation.
- Seek professional advice: It’s vital to engage a lawyer to guide you through the co-ownership process and draft a legally binding agreement.
- Create the agreement: The document should clearly outline financial responsibilities, exit strategies, and conflict resolution methods.
- Sign the agreement: Make it official with signatures from all co-owners in the presence of a legal authority.
Tax implications in New Zealand
Co-ownership can affect your tax obligations, and it’s important to be aware of the implications:
– Capital Gains Tax: While New Zealand doesn’t have a full capital gains tax, if you are deciding to purchase an investment property and sell it within two years of purchasing it (under the bright-line test), you may be liable for tax on any profit. The share of the profit is divided according to the percentage of ownership for each co-owner.
– Rental Income: If the property is rented, each co-owner will need to declare their share of the rental income and associated expenses when filing their taxes.
– Tax Deductions: Co-owners may be able to claim deductions on mortgage interest, rates, and maintenance costs.
Financing your co-ownership property
When it comes to financing, co-owners can apply for a joint mortgage, combining incomes to increase borrowing power. However, all co-owners are equally responsible for the repayments, and any missed payments can affect everyone’s credit rating.
Alternatively, one person can take out the mortgage with co-signers. This method may reduce the complexity of having multiple borrowers on one loan, but the co-signers remain liable if repayments aren’t made.
Planning for the future
Co-ownership requires careful planning, especially for the long term. Consider the following:
– Exit Strategy: If one owner wants to sell or exit the agreement, a clear plan should be in place. This could involve selling the property or having the remaining co-owners buy out the exiting partner’s share.
– Estate Planning: Ensure your will specifies what happens to your share of the property in the event of your death. Consider creating a trust to manage the property, especially if multiple family members are involved.
– Property Management: Co-owners should clearly define responsibilities, from maintenance to tenant management if the property is rented out. Alternatively, you could hire a property manager to take care of day-to-day tasks.
Final thoughts
While property co-ownership can be a smart way to enter New Zealand’s property market, it comes with legal and financial complexities. It’s essential to have a solid agreement in place and seek expert advice before making any decisions.
