We have previously addressed this topic in our article “5 Creative Ways to Get into Your First Home” which was published on our blog last year. Since then, we have noticed that this topic has been in the media and it appears that first home buyers (“FHBs”) raise concerns about this option being too restrictive or complicated. It also appears from social media posts that there is a major lack of understanding when it comes to the current Bright-line rules. Generally, there is also a lack of knowledge in relation to how a property sharing agreement (“PSA”) can make a group purchase less complicated.
Co-owning property with family or friends doesn’t always mean that all the purchasing parties will reside at the property. Sometimes one party is helping another party get on the property ladder but they still want to reserve their right to have some benefit in the form of rent or a percentage of any profit margin when the property sells in the future. Now the Bright-line rules do complicate matters, especially when the property may not be one party’s main residence or when considering the consequences of selling that property sooner than originally planned.
With a good PSA in place, everyone’s interests can be protected and expectations can be clearly set out from the start. A PSA will address issues such as outgoings and expenses, renovations, maintenance, buy-out options, selling shares or refinancing, as well as occupation rights, apportionment of equity on sale of the property, and other important considerations for multi-party ownership.
Co-ownership allows you to pool resources and it gives you better “buying power”. When it comes to lending, having more borrowers that will be liable and able to service that loan may make your finance application more appealing. Considering the median-income household and how long it takes to save a sufficient deposit for a proposed purchase in one of the big cities, this could be a great option for some (especially singles). Despite the benefits of co-ownership, there are obviously some very valid risks. Therefore, it is important to have open and frank conversations with all proposed co-owners and to enter into a PSA.
We have had clients that have entered into this arrangement in the past and all lived together for 3–5 years and either sold the property and split the profit, or one couple has remained and paid the others out. The parties that have been paid out (i.e. sold their respective shares) have then gone on to purchase their own separate property when they previously would not have been in a position to make that return/profit in real estate to then have had a sufficient deposit to put towards their own property.
The Bright-line property rules can be confusing because of multiple changes to the exceptions and time frames since the rules were introduced. Basically, if you sell a residential property that you have owned for less than 10 years you may have to pay income tax on any profit on the sale (less costs incurred, such as an agent’s commission etc.). This rule also applies to NZ tax residents who buy overseas residential properties. These rules were introduced mostly to capture property investors or couples that renovated and sold their house/s in quick succession to “make a quick buck”. The Bright-line rules do not apply to the sale if it is your main home, you inherited the property or if you are an administrator of a deceased estate. Further information about the Bright-line rules can be found on the IRD website.
Despite the many benefits of co-ownership, there are some very valid risks too. We recommend that you always discuss your plans to purchase property with your trusted legal and financial advisors before committing to anything.
If you would like to chat about your co-ownership options, please call or email:
Kim Hunt
Senior Legal Executive
Schnauer and Co Lawyers
Email: khunt@schnauer.com
DDI: 09 892 0351
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