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When navigating the financial complexities of a relationship breakdown, it's important to not overlook the tax opportunities available—particularly when it comes to property ownership. Many couples, especially those who own investment property together, may not realise that the way a property is transferred during a divorce or separation can significantly affect their future tax deductions.

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Standard Property Transfer vs. Relationship Breakdown Transfer

Typically, when property is transferred due to a divorce or separation, it's treated as a relationship breakdown transfer, meaning there are no immediate Capital Gains Tax (CGT) consequences. Instead, the party who receives the property inherits the cost base and any associated tax implications down the line. While this option offers immediate CGT relief, it may limit long-term tax planning benefits.

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In contrast, couples who agree to transfer property at market value—as they would in a regular sale—can potentially open the door to greater long-term tax benefits. For example, if one party buys out the other's share in an investment property using a loan, the interest on that loan may be tax-deductible. This is because the borrowed funds are used to acquire an income-producing asset, not simply to settle a family law obligation.

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Stamp Duty Considerations

The major hurdle in this strategy is stamp duty. While some states offer stamp duty exemptions for transfers following a separation, most still impose this cost. However, it’s worth weighing this immediate expense against the potential value of years—if not decades—of tax-deductible interest. In some cases, borrowing to cover the stamp duty might even be a viable option.

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Capital Gains Tax Implications

Another consideration is CGT. If the transfer is structured as a regular market-value transaction, the selling party may trigger a CGT event and be responsible for any resulting tax. However, the purchasing party starts fresh with a clear tax position, rather than inheriting any built-in gains or deferred liabilities. This can be advantageous in the long term, particularly if the property is expected to grow in value.

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A Matter of Agreement

Of course, this strategy relies on both parties being in agreement—and that’s not always easy in the midst of a relationship breakdown. However, where cooperation is possible, it can offer meaningful financial advantages that go beyond simply splitting assets.

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Seek Professional Guidance

It’s critical to seek both legal and tax advice before proceeding with any property transfer during separation. The right strategy depends on individual circumstances, and the potential benefits must be balanced against legal, financial, and personal considerations.

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As a registered tax agent, I work closely with clients to help them make informed financial decisions during all stages of life—including times of transition. If you’re considering your options after a separation or divorce, feel free to reach out to discuss your specific situation.