If you choose to invest in a second property, it pays to factor in the relevant costs, such as the taxes for buying, as well as maintaining it, so that you don’t end up spending beyond your means.
The last thing you should do is to come up with a dubious scheme, such as to get someone else to hold the property for you so you can avoid paying the additional buyer’s stamp duty (ABSD).
Doing so can actually cause you more pain because it is easy for the taxman to spot irregularities since transactions relating to property purchases are done online now.
In a recent divorce case, the High Court noted a case involving a woman who used her “goddaughter” as the proxy to buy a $3 million second property for her.
The entire purchase was funded by her and she got the buyer to sign a document stating she was the beneficial owner of the property.
The buyer also had to transfer 1 per cent of the property to her so that she could be a co-owner who would be eligible to apply for a bank mortgage.
The taxman has described such sham “99-to-1” arrangements as having no real purpose other than to avoid paying the ABSD.
Those caught doing so will be ordered to pay the ABSD that is due plus an additional 50 per cent surcharge on the levy as a penalty.
Here are two other cases involving owners who over-leveraged on properties.
A couple were happily living in their $2 million condominium unit and would have had no problems in paying off the mortgage, but they chose to buy a second $3 million property.
To avoid paying ABSD on the new property, the husband transferred his share in their home to his wife so that he could buy the second property as a first-time owner.
At the time, the couple had an outstanding loan of $500,000 on their existing home but the wife applied for a further $750,000 mortgage so that her husband could use the extra cash for the second property.
This extra loan lifted the total mortgage to $1.25 million but the monthly repayment of about $5,800 was still manageable due to the low interest rate of 1.2 per cent.
All was well until the husband’s business hit a bad patch, which resulted in his creditors suing him.
As a result, the couple lost the second home because it was in the husband’s sole name.
To make matters worse, the wife was later retrenched and had to settle for a new lower-paying job.
But they are still burdened by the higher mortgage because they had over-leveraged their property investment.
A woman put a $2 million apartment on trust for her then six-year-old son but wanted to sell it when the value of the property went up by about $500,000.
When she applied to the High Court for permission to sell it, she could not convince the judge that the sale was for the benefit of the son, the beneficial owner of the property.
Currently, parents who want to buy properties on trust for children under the age of 21 would have to pay 65 per cent ABSD for such arrangements.
They can apply for a remission of this sum only if they can prove that the trust is genuinely meant to benefit their children.
Once the trust is properly set up, the assets will be vested in their children when they turn 21 years old.
Parents who want to sell such assets before that will need to get approval from the court.
Even after the sale, they cannot use the money for themselves because the funds, which must be deposited into a special bank account, can only be used for the kids.
Parents who misuse such funds can be taken to task by the taxman because it shows that the original trust is a sham to avoid paying ABSD for buying the extra properties for themselves.
In this case, the woman could not even get past the court because she could not show that her intended sale was meant to benefit her son.
So the lesson here is simply this – if you need to come up with a scheme to avoid ABSD, it is a sign you may be overstretching your budget and thus could fall into a bigger debt trap.
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