What is a Property Sharing Agreement (PSA)?

A Property Sharing Agreement is a legal document that protects everyone's interests when co-owning property. It addresses important matters like outgoings and expenses, renovations and maintenance responsibilities, buy-out options, selling shares or refinancing, occupation rights, and how equity will be split when the property is sold.

How do the Bright-line rules affect co-ownership?

The Bright-line rules mean you may have to pay income tax on any profit if you sell a residential property within 10 years of purchase. However, the rules do not apply if it is your main home, you inherited the property, or you are an administrator of a deceased estate. Co-ownership can complicate this if one party does not reside at the property as their main home.

What are the benefits of co-owning property with others?

Co-ownership allows you to pool resources for better buying power and can make your finance application more appealing to lenders. It can help you get onto the property ladder sooner, especially in expensive cities where saving for a deposit alone takes a long time. Many co-owners have successfully lived together, built equity, and later sold or bought each other out to purchase their own properties.

What risks should I consider before co-owning property?

Key risks include potential disagreements about property decisions, changes in personal circumstances, and complications with the Bright-line rules. It is essential to have a comprehensive Property Sharing Agreement in place and to discuss your plans with trusted legal and financial advisors before committing to co-ownership.

Co-owning Property with Family or Friends

We have noticed that co-ownership 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.

What is Co-ownership?

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.

The Benefits of Property Sharing Agreements

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:

Outgoings and expenses
Renovations and maintenance
Buy-out options
Selling shares or refinancing
Occupation rights
Apportionment of equity on sale of the property
Other important considerations for multi-party ownership

Why Consider Co-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).

Real Success Stories:

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.

Understanding the Bright-line Rules

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 If:

It is your main home
You inherited the property
You are an administrator of a deceased estate

Further information about the Bright-line rules can be found on the IRD website.

Important Considerations

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.

Learn More: Buying Property With Others: Things To Be Aware Of