How to Avoid ABSD When Buying a Second Property: Understanding Decoupling and the 99-1 Ownership Structure

What is ABSD, and Why Does it Matter?

ABSD is a tax designed to control property demand and discourage speculative buying. For Singaporeans purchasing a second property, ABSD is set at 20% of the property price, while for a third property, it rises to 30%. For permanent residents and foreigners, ABSD rates are even higher. By understanding and implementing decoupling, buyers can potentially reduce their tax burden and make property purchases more financially feasible.

What is Decoupling?

Decoupling is a legal approach where one co-owner of a property “sells” their share to the other co-owner. This results in one party holding full ownership of the property, while the other is no longer associated with it, effectively allowing them to buy a new property as a “first-time buyer” without incurring ABSD.

Decoupling is suitable primarily for private properties, as HDB flats do not typically permit co-owners to remove one name to create sole ownership. Below, we explore two common decoupling structures: 50-50 and 99-1 ownership, each with its own financial implications.

Decoupling with a 50-50 Ownership Structure

In a 50-50 ownership structure, both parties hold an equal share in the property. Let’s say James and Rachel co-own a $1 million private condominium, with an outstanding loan of $500,000. Here’s how decoupling would work in this scenario:

1. Calculating the 50% Share: Since James and Rachel each own 50%, Rachel’s share is valued at $500,000 (50% of the property’s $1 million value).

2. Purchase of Rachel’s Share by James: James will buy out Rachel’s 50% share for $500,000. The purchase financing is structured as follows:

   • 5% Minimum Cash Payment: James needs $25,000 in cash (5% of $500,000).

   • 20% CPF Contribution: James can use $100,000 from his CPF savings.

   • 75% Loan: The remaining $375,000 can be financed through a loan.

3. New Loan Structure: James’s total loan becomes his original share of the loan ($250,000) plus the new loan of $375,000, resulting in a total loan of $625,000.

Stamp Duty Calculation for 50-50 Decoupling

When buying out Rachel’s share, James incurs Buyer’s Stamp Duty (BSD) on the $500,000 purchase. The BSD is calculated as follows:

• 1% on the first $180,000 = $1,800

• 2% on the next $180,000 = $3,600

• 3% on the remaining $140,000 = $4,200

Total BSD: $1,800 + $3,600 + $4,200 = $9,600

After this transaction, Rachel is free to purchase another property without incurring ABSD, as she no longer holds any ownership in the first property.

Decoupling with a 99-1 Ownership Structure

In a 99-1 ownership structure, one party holds a 99% stake, while the other holds just 1%. This allows for a minimal cost transfer if the 1% owner wishes to sell their share later. Let’s look at an example with Chris and Diana, who own a $1 million property with a $500,000 outstanding loan.

1. Initial Ownership: Chris holds 99% of the property, while Diana holds 1%. If Diana decides to sell her share to Chris, they can proceed with the following steps.

2. Cash Payment for 1% Stake: Chris buys Diana’s 1% share for $10,000 (1% of the $1 million property value).

3. Loan Restructuring: After the transfer, Chris’s loan will be restructured to cover 99% of the outstanding loan, amounting to $495,000. This is because Diana’s 1% share included a proportionate share of the loan, which she no longer holds.

4. CPF Refund Requirement: Diana must refund any CPF funds she used for the property back to her CPF account, along with accrued interest. Even if she only receives $10,000 from the sale, she is still required to return all CPF funds used, including accrued interest, to the CPF Board.

Stamp Duty Calculation for 99-1 Decoupling

For the 1% transfer, Chris incurs Buyer’s Stamp Duty (BSD) on the $10,000 purchase price. The calculation is as follows:

• 1% on $10,000 = $100

Total BSD: $100

This 99-1 decoupling structure allows Chris to assume full ownership at a minimal cost, making it a practical choice for co-owners seeking future flexibility in property transfer costs. However, it does not exempt either party from ABSD for future property purchases.

Comparing Decoupling Options:50-50 vs.99-1

Here’s a summary comparison of these decoupling structures:

Key Takeaways

• Both 50-50 and 99-1 are Decoupling Scenarios: Decoupling can be structured in different ways depending on your financial and future transfer goals. A 50-50 setup involves a larger buyout, while the 99-1 structure allows for a minimal-cost future transfer.

• CPF Refund Obligations Apply: In both scenarios, any CPF funds used by the seller must be returned to the CPF Board, including accrued interest, even if the amount received from the sale is less than the CPF used.

• Professional Advice is Recommended: Decoupling involves legal, financial, and tax considerations. Consulting a property expert can help you make informed decisions and align your approach with your financial strategy.

Making the Right Choice for Your Property Journey

Whether you’re considering a 50-50 or 99-1 decoupling structure, it’s essential to weigh each option carefully against your long-term goals and financial situation. Both methods offer strategic ways to manage ownership and tax liabilities, but they come with their own complexities.

At Homeasset.sg, we’re here to support you through every step of your property journey. If you’re ready to explore these options further or need expert advice tailored to your unique situation, reach out to us. We’re committed to helping you make informed, confident decisions for a successful property investment.