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Investment property gotcha in financial settlement

Financial settlement can be stressful as you collate all your assets, liabilities, super, financial contributions, non-financial contributions and future needs!

If that wasn’t enough then you have to obtain supporting evidence such as valuations for businesses, superannuation, properties, cars, loan statements, financial statements, payslips, rental income and any other asset with significant value!

The next step is to agree on all the values on your balance sheet, then obtain independent legal advice on what the % range you might achieve if your case went to court. This gives you a reality check on what to expect as a financial outcome. It is important to ensure you negotiate understanding what your best-case outcome would be versus your worse-case outcome. Think about a couple of options in between that you could live with.

Many parties have a family home and an investment property whereby they agree that one party will keep the family home and the other will keep the investment property to move into. Everyone is happy they have a home each BUT the party who took on the investment property may not be aware that when the investment property is sold in the future there will be a capital gains tax required to be paid. The amount to be paid could be 50% of the profit made from what the purchase price was to the sold price. It is possible to claim the expenses incurred in maintaining that property whilst it was an investment but still many people find themselves with a Capital Gains Tax (CGT) bill when they sell the property which could be tens of thousands or hundreds of thousands of dollars depending on the value of the asset.

More affluent families may have multiple investment properties as well as a family home. If there are two investments properties with similar value, parties may choose to have an investment property each and split the family home with a % agreed. Both parties would not only take the investment property asset but it’s loan and tax liability too.

The tax liability could be even greater if your investment property was a new build when you bought it requiring an ATO GST tax to be paid also.

It is so important to gain advice from your accountant on what capital gains tax (CGT) you would need to pay when the property is sold so that you can either contemplate selling the asset as part of financial settlement to enable both parties to share in the cost of the capital gains tax or keep the asset aware that you will have a capital gain tax to pay when you decide to sell in the future.

When you have a legal consultation prior to mediation it is important to obtain legal advice on what the tax implications will be if you retained the property or whether you are able to have the tax liability considered in the financial settlement outcome.

So, consider very carefully whether you want to keep the investment property with the impending tax debt or sell it as part of the financial settlement and share the tax debt.

Many people are shocked when they go to sell their investment property years later to find that have a hefty capital gains tax bill to pay on their own. It is not so bad if your income for that financial year was low but can be significant if your income was high for the year of the sale of the property as it is based on your income tax %.

Obtain the advice you need before you go to mediation via your accountant and lawyer so you can make informed decisions during mediation and not get surprises later.

Author – Cheryl Duffy, Divorce & Conflict Coach, Family Dispute Resolution Practitioner, NMAS Mediator & Parenting Coordinator

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