9 Common pitfalls to avoid when decoupling your property

9 Common pitfalls to avoid when decoupling your property

Table of Contents

Introduction

The thought of finally fulfilling your aspiration of owning your second property can be exhilarating. Imagine the excitement of viewing and purchasing your second condominium and flipping it for a handsome profit down the road.

This may be what motivates you to research into the topic of decoupling.

Given that decoupling is an extensive topic with many areas to cover, it helps to put in the effort to develop a thorough understanding of the topic before execution.

In previous articles we had covered the following important sub topic relevant to decoupling

In this article, we will specifically touch on the 9 common pitfalls that you should avoid when decoupling your property.

Without delays let’s jump into our list of 9 pitfalls to avoid.

#1 – Leaving party not having sufficient financing capability to purchase second property

As you are eager to decouple your property and work to jump start the process of decoupling. It is common that you and your property consultant spend the bulk of the financial calculation process on detailing the cost of decoupling and considering if you and your spouse have got sufficient funds to decouple.

It is common to neglect the process of considering whether your spouse, the “leaving party”, the party that is going to be selling his or her share in the current property, has got ample financing capability to purchase a unit with good capital appreciation potential.

This budget constraint often leads to couples purchasing property with sub optimal fundamentals as their second property. While it fulfils your aspiration to own two properties, the ultimate goal of making more profit may be compromised if your second property do not appreciate in value over time.

Some examples of sub optimal property selection caused by budget constraint will be as follow

  • Selecting a one bedder unit in developments in location that are not appealing to tenants, eg developments that are not proximate to MRT station
  • Purchasing a small one or two bedder unit in a location that is mainly sought after by families. With a better budget, purchasing a three bedder unit will provide more optimal upside potential
  • Buying into a small boutique development with less than 300 units, due to price constraints. Boutique developments have shown challenges in price appreciation due to limited transaction volume.

#2 – Not factoring the need for CPF refund

In the process of decoupling, as you buy over your spouse’s share. The cash proceeds that will be unlocked as you pay for your spouse’s share is crucial for your next property purchase. As the cash proceeds will be used to pay fully or partially for the deposit of the second property.

But due to the need to refund proceeds from the internal sale of shares back into your spouse’s CPF ordinary account. There could be a situation whereby the CPF refund is greater than cash proceeds, leading to a situation whereby you need to top up cash for refunds back into your spouse account.

This usually happens when your spouse has infused a proportionally much larger amount of CPF in the property than you, the staying party looking to purchase your spouse share.

As a side note, refer to this dedicated article on how much cpf should you use when decoupling, refer to article link inline.

Consider the following example.

You and your spouse own a property that is valued at $1.2 million.

And prior to purchasing the property, you and your spouse plan ahead for decoupling and structure the ownership structure in a 99-1% split, with you owning 99% of the property and your spouse owning 1% of the property.

Side note, a 99-1 tenancy in common structure is often adopted to reduce buyer stamp duty incurred. As stamp duty will only be levied upon the 1% share value of the party that is selling his or her share to free up his or her name for second property purchase.

In this equation, you will only be paying you 1% of $1.2 million, which amounts to only $12,000.

Assuming your CPF spouse contribution for this property amounts to $200,000. During the decoupling process, you would have to top up the shortfall of CPF with a cash amount of $188,000. This amount that needs to be refunded into your spouse account will result in a significant drain in cash.

To avoid this situation, some pre-planning on how much CPF to use for each party will be required. Normally, the party that is looking to sell his or her share should minimise the use of their CPF, to reduce the amount of CPF refund and accrued interest to be refunded back during the decoupling process.

#3 – Cost of decoupling exceeding the cost savings from not paying ABSD

The cost of paying ABSD is definitely significant, assuming you are a Singaporean citizen paying a hefty 20% ABSD on a $1 million property, easily come close to $200,000.

But sometimes the cost of decoupling can also add up under certain circumstances and one may be better off paying ABSD or postponing plans of decoupling under such a situation.

Below are some of the key cost element that could drive the cost of decoupling up significantly.

Seller stamp duty

Seller stamp duty is a duty levied on property that sells their property within three years of purchase.

The rates for seller stamp duty is as follow.

  • Selling within 1 year of purchase – 12% on sale value or property value whichever higher
  • Selling between 1 year and up to 2 years – 8% on sale value or property value whichever higher
  • Selling between 2 year and up to 3 years – 4% on sale value or property value whichever higher
    More than 3 years – no SSD payable

Early loan redemption penalty

Another cost element that is often overlooked is the early loan redemption penalty. When you secure a mortgage with a bank, there is often a 1-2 year lock in period.

And for the sake of decoupling, it would require the existing mortgage to be redeem and refinance, this would result in a early loan redemption penalty and the bank would incur a 1.5% charge on the loan outstanding amount

Assuming A Outstanding Loan Size Of 1 Million, This Would Come Up To $15,000

Hence it is important to account for these costs and also consider how you can time your decoupling to avoid incurring seller stamp duty and early loan redemption penalty to make your cost saving from not paying ABSD worthwhile.

# 4 – Did not consider the time required for CPF to be refunded back into leavings party’s account

Following the sequence of events in the decoupling process, you or your spouse can purchase the second property without ABSD once the sale and purchase agreement between you and your spouse is signed.

But from a timeline perspective, the time in which CPF from the proceeds of decoupling will only flow back into you or your spouse CPF account in 1-2 weeks time after the completion of the entire decoupling process which will take around 10-12 weeks.

Making the second property purchase immediately after the completion of the decoupling process, when CPF has not been refunded back into your spouse account may result in a shortfall of funds required for downpayment of the second property.

This may result in a need for a bridging loan which will result in a interest expense of between 5-6% per month

So from a timeline perspective, it will be important to take note of the additional 1-2 weeks required for CPF to be refunded back into yours or your spouse OA account.

#5 – Not ensuring property payment trail

Given that decoupling is a buy and sell transaction between you and your spouse. You may have the misconception that maintaining the formality of making payment to each other is unnecessary.

On the contrary, with the recent IRAS investigation over any potential schemes that involve avoidance of taxes. It is important to maintain a legitimate and well documented payment trail that proves that the decoupling process is conducted through an arm’s length buy and sale transaction.

So it is crucial to ensure cashier’s orders are being issued from an individual account which belongs to either you or your spouse and not use a joint account to make any of these payments.

And it is important to ensure that there is an actual flow of funds between you and your spouse’s account.

#6 – Attempting to decouple by transferring property as a gift

Generally, there are two methods to decouple a property, one via an internal buy and sell process known as part purchase. Another method being transfer by way of gift, this method would entail you gifting the property without charge to your spouse.

This method brings about several pitfalls

Firstly, decoupling a property by gifting would still incur a buyer stamp duty on the share of property being transferred.

Next, you will need to be mindful that the insolvency act will come into play and potential creditors can have a claim over your property within 3 years from which the property was given to your spouse as a gift.

With that you or your spouse would have a challenge selling the property and securing financing on the property. As buyers and banks will not be willing to risk having the property being clawed back by creditors within the 3 years time frame.

#7 – Not understanding divorce law

Couples often have concern over the share of ownership when the property is structured in different proportions of ownership, example 99-1.

In the case where the couple have decoupled and are holding two properties. They will be concerned over which property is held under whose name.

The common misconception of how assets are distributed in the case of an unfortunate divorce leads to these concerns that one party may be unfairly treated due to a smaller share ownership or title ownership in a lower valued property.

The truth is that the court does not consider asset distribution based on title ownership, but it will consider a broader list of factors under the women’s charter and also consider how each spouse’s effort directly or indirectly contributed to the asset.

Check out our dedicated article on “What happen if divorce after decoupling property“.

#8 – Confusing decoupling 99-1 with 99-1 ABSD Loophole

The recent IRAS probe into the 99-1 tax evasion scheme, has led many property owners to confuse decoupling with the 99-1 scheme. This has led to many property owners approaching decoupling with apprehension, with concerns over its legitimacy.

In reality, the 99-1 scheme functions very differently from decoupling. It involves a buyer that does not have any existing property, front a property purchase and then quickly selling 1% share to another party that has got an existing property.

Instead of paying 20% ABSD on the full purchase price of the property, he or she only has to pay 20% on the 1% share being sold to him.

This short duration sale of the 1% share, triggered IRAS investigation as it possess characteristics of an artificial scheme to avoid tax.

Where else decoupling which involves a legitimate arms length sale and purchase process between joint owners of a property is not deemed illegal by IRAS.

To learn more about the difference between 99-1 ABSD loophole and decoupling check out the following article

#9 – Not considering the Sell one buy two approach

When one is looking to progress from a single property portfolio to a duo property portfolio, normally there are two approaches that can be considered. One being decoupling that we have discussed at length, the other being the Sell one buy two approach.

You would normally want to adopt decoupling for the following reasons.

  • You want to retain your existing property because you believe there is ample runway for future price appreciation. Probably due to some future growth catalyst like the completion of a MRT station or URA transformation.
  • Your current property fulfils your current lifestyle needs. It is located near your child’s school or near your parent’s place

Given that retaining your current property is not a top priority, the Sell one buy two approach could be a better option.

It will allow you to sell your current property, unlocking the capital appreciation, redeploy the capital into purchasing two private condominiums, with each property having you and your spouse as sole owners.

Final Words

This marks the end of our 9 common pitfalls to look out for when decoupling. Hopefully this gives you a head start on what to look out for when planning your next steps for decoupling.

More reads, more gains ?

Kudos on making it this far. The fact that you have invested the last 5 mins reading this article. We believe you are a like minded real estate investor looking to beat the rat race by getting more out of your real estate investment.

If so, do check out the following articles.

Author

  • Jue Wen

    Jue Wen is the content marketing lead. This means he spend his waking hours researching and writing all things real estate. He believes life is a hustle and there is no joy in grinding away daily in our little rat races. He believes making wise moves in real estate investment can be a game changer. Aside from writing all things real estate, you can find him in your nearest bouldering gym.

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Jue Wen

Author

Jue Wen is the property analyst and content marketing lead at decoupling expertise.
He specialises in helping clients overcome the complexities involved in owning their second private property in Singapore.
He had over 10 years of experience in real estate investing and have written over 40 detail guides on decoupling and minimising ABSD. He is a licensed real estate consultant and holds a Bachelor degree in Business Management from the Nanyang Technological University.

Kenji

Co-Author

Kenji is the Group Division Director of ERA Realty Network.
He have got over 20 years of experience in real estate and have successfully helped over 50 couples purchased their second property. He specialises in helping client achieve the best approach towards acquiring their ideal investment properties while minimising ABSD.