How to beat ABSD with creative methods and own Multiple Properties
Ever since the ABSD (Additional Buyer Stamp Duty) was introduced, it seems like that's the end of the road for a person to own multiple properties and to make money from property as investments.
Even if you can afford to pay the ABSD, it eats into a huge chunk of your profit made.
But like with everything else, is there a loophole or way to circumvent this?
Firstly, here's a quick summary of the ABSD rates to jog your memory.
Singaporeans and PRs ought to own properties without having to pay ABSD as this is our privilege! (Source: Ministry of National Development)
ABSD is calculated as a percentage of your property purchase price or valuation, whichever is higher.
Singapore citizens (SCs) pay 12% ABSD for their second property purchase and 15% for their third and subsequent purchases.
Singapore Permanent Residents (SPRs) pay ABSD of 5% on their first property purchase and a flat 15% on all their subsequent purchases.
Foreigners pay 20% on all property purchases.
Entities pay 25% ABSD on property purchases (only if you wish to acquire the property through a company).
An interesting point to note: United States citizen pay the same ABSD rates as Singapore citizens. Permanent Residents of Iceland, Lichtenstein, Norway and Switzerland can apply for the remission of ABSD. This is under FTAs that are in effect at the time of writing. Foreigners should check with their respective authorities if their home country's taxes will also apply on top of the ABSD.
So how do you save on ABSD and own multiple properties then?
There are only a few ways to legally save on ABSD:
Buy under 1 owner for a property so that the spouse can buy another under their own name
Decoupling an owner from a current property to free up one name
Use your children's (must be above 21 years old) name to "unofficially" buy the property
Buying Under a Property Trust under a child's name who's below 21 years of age
Method #1: Buy under 1 owner for a property so that the spouse can buy another under their own name
This is the most straightforward method to have two properties in the family.
When you purchase your first home, such as a HDB flat or condo, just make sure you or your spouse is not listed as the co-owner. In the case of a HDB flat, one of the names can be listed as a occupier.
The listed owner , however, is legally obligated to pay the mortgage and all expenses related to the property. You have to work out between your spouse and yourself on how to split the monthly bills.
Later on when you decide to buy a private property, the name that is not used in the first home can then be used as a first-time home buyer and not pay ABSD (or they only pay 5% if they are a Permanent Resident).
Some considerations for this method:
Only Sole Owner's CPF Ordinary Account Funds can be used
The sole owner's income must meet the requirements to qualify for the home loan
For brand new ECs (Executive Condominiums) and HDB flats, the loan repayments cannot exceed 30% of the sole borrower's gross monthly income (this is also known as the Mortgage Servicing Ratio).
For private properties and resale condominiums, the home loan - plus all existing debt obligations - cannot exceed 60% of the sole borrower's gross monthly income. (This is known as Total Debt Servicing Ratio- TDSR).
There must be an understanding and acceptance amongst parties involved that the sole owner is the one who has legal rights to the property. He or She owns the deed to the property even though the other party or partner contributes equally or even more to the mortgage.
In a typical scenario, it's definitely recommended for the higher earner to own the higher value property. Besides qualifying for the loan, this arrangement would support future portfolio growth plans when you take equity or term loans off a property and free up some liquidity when it appreciates in value.
Method #2: Decoupling an owner from a current property to free up one name
'Decoupling' is when one co-owner transfers their share of the property to the other co-owner(s).
When the exiting party buys a property, they will be considered as a first-time home buyer, provided their name was not used to purchase any other properties.
Do take note that married couples cannot decouple using this method for HDB flats as this loophole was ceased from May 4 2016.
Decoupling is very commonly used method for many married couples in the past, before ABSD was introduced. Most couples used both names to purchase properties as that was the norm.
To put it simply, it is the removal of one owner through a "buy out" by the other party. Decoupling is also known as part purchase or part-sale.
More recently, there are permutations that emerged as a result of insufficient financing abilities.
Say you and your spouse purchase a private property as tenants-in-common.
This allows you to split the percentage of ownership of the property. The common form of this holding method is to split the ownership 99 percent and 1 percent (e.g. your spouse owns 99 per cent and you own 1 per cent).
What is the benefit of doing so?
The immediate plus is that both of the spouses income can then be used to support the home loan application and both parties' CPF Ordinary Account can be used for downpayment and ongoing mortgage instalments.
And a few years later, maybe after having saved up enough money to invest in a second property, you can then sell your 1 percent ownership to your spouse.
This will trigger the Buyer Stamp Duty (BSD) only on the value of the 1 per cent being transferred. BSD must be paid in cash before it can be redeemed through CPF later.
If this transaction happened within 3 years, you will incur a Seller Stamp Duty (SSD) of 4-12%. The SSD will depend on which year you are transferring the property ownership. The percentage decreases by 4% every year starting with 12%.
Read on to find out what to look out for when buying a property in Singapore.
This is why most people won't do 50-50 splits as this would incur must higher BSD/SSD when they do make the transfer.
Other fees that you will incur are the legal fees for two lawyers. One will represent seller and the other will represent the buyer and possibly mortgage loan restructuring fees and penalties.
After the sale has been exercised, the exiting party can then proceed to buy another private property as a first-time home buyer without incurring ABSD.
There is no need to wait for the decoupling process to be completed before buying into the new property.
What are the considerations for this method?
You must have enough cash/CPF to return the exiting party's CPF used plus accrued interest (unless you have gotten a written reply from CPF that allows a waiver for this refund)
You must have sufficient income to take over the full loan by yourself
If you do not have sufficient funds, there are creative financing methods such as pledging of assets and some less orthodox methods, which I'm not going to state here (lest the authorities are reading this and give me unnecessary heat).
I will cover some of the "documentable" methods in a creative financing techniques article separately.
Back to the topic at hand, you will need to accept that the manner of holding such as 99%-1% may not reflect the actual situation (the 1% holder for example may be paying for most of the mortgage).
This is usually not a big deal at the point of purchase, but it could be in cases of dispute or divorce.
Two conveyancing firms would be needed to handle the decoupling or sometimes different lawyers in the same firm can handle it. The process can take 4-6 weeks, and costs a total of approximately $5,000-$6,000 SGD.
A word of caution: It is important for you to work with experienced and up-to-date conveyancing lawyers.
Not all lawyers specialise in conveyancing, though some will claim to do when they have only done a handful of it over the years. It may cost you dearly, financially and emotionally, if you hired someone who is not familiar in this arena.
Method #3: Use your children's (must be above 21 years old) name to "unofficially" buy the property
If your child is above 21 years of age, you can use their name to purchase a private property but you essentially provide the funds to make the downpayment and subsequent mortgage instalments.
As a first time home buyer, a Singaporean would not need to pay for ABSD.
While it sounds easy enough, this method may result in complications further down the road.
The 1st possible blind spot is that your child now would be considered private property owners. If she or he were to get married and buy a private property of his or her own, you will have to dispose of the property or transfer the property back to yourself with ABSD payable or pay the ABSD for his or her matrimonial home.
If your child decides to buy a BTO (Build To Order) flat or Executive Condominium (EC), she or he would have to dispose of the private property at least 30 months ahead of their application. This would require advance planning, more so if the property is subjected to Seller Stamp Duty as well.
The second blind spot is that your child has to qualify for the mortgage loan.
For this to happen, they need to have sufficient income proof by themselves as the parents' income cannot be included in the application.
If they have not started working yet, there may be ways around it. But contact me to find out more.
The third blind spot is one involving trust.
Your child is the legal owner of the property. They can sell it, rent it, use it as collateral, etc.
This could end up in some disputes which may go to court.
This seems to be an easy way to save on ABSD, but it is important to have an honest discussion and anticipate possible issues that may come up in the future.
Verbalising and documenting potential pitfalls always give you a lot more clarity and assurance of your options later on.
Method # 4: Buying Under a Property Trust under a child's name who's below 21 years of age
This method is for those with holding a sizeable amount of cash on hand as this requires the full purchase price to be paid fully without loans or usage of CPF.
You can set up a property trust for your child below 21 years of age and buy the property under the trust with yourself being the Trustee.
Legally, the property which you purchased belongs to the child, who is the beneficiary.
As the Trustee, you are liable to pay for any costs like taxes and maintenance.
Since you are not legally the owner, it will not add to your property count. If you were to buy a second home, you will not be subjected to ABSD.
As an added bonus, debtors cannot seize this property from you if you're ever declared bankrupt (touch wood).
In the eyes of the law, the property does not belong to you.
That also means that any income or sales generated from the property does not belong to you, but the beneficiary. Though this can be worked around by having a joint account with both your names.
The Buyer Stamp Duty and other related expenses has to be fully paid in cash.
In case you're wondering, for your child older than 21 years, setting up a trust in their name could implicate them in abetting ABSD avoidance.
Lastly, you could consider investing in commercial and industrial real estate, if you're ready to commit. You can read my article on buying commercial properties here.
Commercial and industrial real estate requires a bit more understanding and research and is quite different from residential.
There are different segments to commercial and industrial properties such as shophouses, retail, F&B outlets, offices and industrial B1/B2 sites. All of these carry different risks and returns which may not suit everyone.
They are only subjected to GST (if seller is GST registered) and there is no ABSD payable on them.
Which methods works best for you?
There isn't a single best method as this depends on your family profile, plans and the current situation you are in.
There are many advanced structuring strategies that consist of layering methods in different orders (official and unofficial ones) to help investors own more properties, obtain higher financing and save on tax and expenses.
This is more complex in nature and if you wish to discuss more, feel free to reach out below to schedule a video consultation.
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About the Author, Susanna Wong:
Susanna has been in real estate since 2006. She has transacted many private properties including GCBs (Good Class Bungalows) and Sentosa landed properties and of course HDBs. She is married with two lovely girls, Sophie, 6 and Sage, 2. Her husband, Roger and her share an obsession for MMORPGs and scrabble (before they had kids!). They met on OKCupid (dating app) while challenging each other on Words with Friends (iphone App game). She loves watching binge watching Netflix in her free time (very rare with two children!) with a tub of Ben and Jerry's.