Fractional Purchase & Decoupling

Don’t be too quick on the trigger to snap up bonds and equities — property presents a much less volatile investment with gradual but steady appreciation, an increasingly rare trait in the modern, turbulent global market.

Besides being an alternative to major asset classes for portfolio diversification, it brings some additional utility to the table. You can stay in a property as your primary residence, or receive monthly payments from the tenants you rent it out to, the latter option furnishing you with stable cash flow.

It might therefore strike you as odd that, despite the numerous advantages, not everyone is flocking to purchase a second property for investment purposes. There’s a good reason for that: the Additional Buyers’ Stamp Duty, or the ABSD for short.

The ABSD was introduced in 2011 as a cooling measure to temper the spike in property prices at the time brought about by high demand. To manage this demand and keep housing prices at a reasonable level for the average Singaporean, the ABSD was designed to tax those purchasing more than one property as well as foreigners.

Although the ABSD can prove to be quite the hindrance for your typical married couple looking to get a second property for investment, there are methods to circumvent this bureaucratic roadblock and still come out on top financially. Enter decoupling and part-purchase.

Decoupling involves separating a couple’s ownership status of a property by removing one spouse from the ownership. This frees that spouse from potentially having to fork out ABSD for a new property as it will not be imposed since officially, they do not own any property.

The first step of decoupling is dependent on the manner of holding in which your property is owned. Married couples most commonly purchase their home as joint tenants, which would require the severance of said tenancy before any further action is taken.

The result is a conversion of the joint tenancy to a tenancy-in-common in equal shares, meaning both spouses will each hold a 50% share of the property.

The part-purchase component comes in when one of the spouses then buys over all the shares owned by the other spouse. This is usually executed through a standard sales and purchase agreement, and this transfer of ownership effectively places the entire property under the sole proprietorship of just one spouse.

As with every sales and purchase agreement, there are matters such as BSD, CPF, and mortgages to take into consideration. More on that in just a bit.

With some foresight, it is possible for the initial portion of the above process to be bypassed. Should a couple have the inkling that the purchase of a second property is somewhere in their future, they could purchase their first property directly as tenants-in-common.

Not only does this negate the need for the severance of joint tenancy, it could also drastically lower the amount of BSD paid if done prudently. You see, if the ownership of a property is split 99:1 between both spouses, any BSD paid in the future would only apply to the 1% share that gets transacted. This is opposed to the non-negotiable 50:50 distribution brought about by a severance of joint tenancy.

Given that your property is not encumbered, then more power to you! There’s really only the BSD of the part-purchase and the new property to worry about in this case.

If you’re not so lucky, you will also have to discharge your existing CPF and mortgage charges. This can be handled by your lawyer through the refinance or full redemption of your mortgage and returning all CPF money, with accrued interest, back to your CPF account.

The idea here is to remove your name from all CPF Board charges and bank loans, thus freeing you entirely from any encumbrances or liabilities and allowing you to purchase a second property with no ABSD.

If you’re not thoroughly convinced, let’s run through a hypothetical. Say you and your spouse currently own a property, valued at $2 million, and have decided upon purchasing a second property for investment, valued at $1.5 million.

Without Decoupling, you’ll be unceremoniously slapped with an ABSD of $180,000 (12% of the property value for Singaporean Citizens purchasing a second property).

With Decoupling, however, you’re looking at a far more conservative cost. The BSD payable for the part share purchase of your first property would be $24,600. Combined with the legal fees of around $6,000 and associated miscellaneous costs (valuations, processing fees, etc.) of estimatedly $1,000, the total cost of the process would come out to roughly $32,000.

That’s a whopping $148,000 of savings you just made.

Granted, this example has been simplified for the sake of easier comprehension, and every decoupling case will have its circumstantial differences which will undeniably affect the exact amount of money you save, if any at all. It’s completely possible in some conditions that paying the ABSD turns out to be the more economical solution.

To get a more exhaustive understanding of the decoupling process and how it can benefit you, do arrange for a consultation with us.