One of the most common methods used to avoid incurring the Additional Buyers Stamp Duty (ABSD) is decoupling. This is when you transfer your share of the property to your co-borrower – such as your spouse – and then buy another property under your own name.
As you no longer own a property when buying the new one, you would not incur the ABSD (12 per cent on the second property for Singapore Citizens, and 15 per cent for Singapore Permanent Residents).
This is the most accepted approach, hence, buyers are often surprised when I tell them it’s not always a good idea. In fact, there are times when you could save more money by just paying the ABSD, instead of decoupling.
This is how such a situation could happen:
First, let’s understand the full potential costs of decoupling
Many people are under the impression that, after paying the legal fees, the cost of decoupling is settled. This is not correct. There are two other important costs we need to consider.
(Bearing in mind that legal fees can be hefty too; it typically costs around $5,500 to decouple).
Transferring your share of the property is not free, and incurs stamp duties
When you transfer your share of the property to your spouse, they must still pay the Buyers Stamp Duty (BSD) for the share of the property they receive. The BSD is based on the higher of the selling price or actual property value, so you cannot “cheat” by trying to sell your half for $1.
For example, let’s say you and your spouse are currently the co-owners of a condo unit, with a market value of $1.5 million. You purchased this unit two years ago.
Besides this property, your spouse also owns another smaller property that she inherited from her parents.
Your goal is to decouple so that you can purchase another small property under your own name, to be rented out.
If you were to transfer your half of the condo ($750,000) to your spouse, this would normally incur a BSD rate of $17,100. (You can see how BSD rates are calculated on the IRAS website).
However, this is not all. Since your spouse already owns a smaller property, she will incur the ABSD when you transfer your share of the condo to her. Assuming she is a Singapore Citizen, she would have to pay an ABSD of $90,000.
Now, because the condo was purchased just two years ago, the Sellers Stamp Duty (SSD) would also apply. This is 12 per cent on the first year, eight per cent on the second year, and four per cent on the third year.
In this scenario, transferring your share of the property to your spouse would incur SSD of $60,000.
How much have we paid so far, in the above scenario, instead of just paying the ABSD?
If you total up the costs for decoupling in the above scenario, it comes to a total of $172,600.
Now, let’s say the property that you want to buy is a compact unit, costing about $1.2 million. The ABSD for this property would be just $144,000 if you’re a Singapore Citizen.
Overall, you would save $28,600 by just paying the ABSD, instead of decoupling!
In this scenario, we haven’t even addressed the fact that you need to pay off your outstanding home loan, and that too can incur penalties
When you decouple, your outstanding home loan with your co-borrower must be paid off, and a new mortgage drawn up with your co-borrower as the sole borrower.
That means your co-borrower will need to meet standards like the Total Debt Servicing Ratio (TDSR), to be able to take on the full loan.
On top of that, discharging the existing mortgage early can incur prepayment penalties – often around 1.5 per cent of the amount prepaid (although this penalty usually applies only in the first three to five years).
None of this is to say decoupling is bad, and in fact, most people save more by decoupling than paying the ABSD
I just want you to be aware that it’s not true, 100 per cent of the time. Sometimes, paying the ABSD can be cheaper, if you face a combination of factors like:
- Your co-borrower owns another property, and would incur ABSD if you transfer your share
- You would incur penalties and cash issues by having to discharge the outstanding home loan prematurely
- You are within the three-year SSD period when you try to transfer your share to your co-borrower
- The property you’re trying to acquire is much lower in value than your existing property, making its ABSD cheaper than your combined decoupling costs
If you’re uncertain about the numbers, contact me on Facebook and I can help you to work out a cost-effective route.
You can also follow me on RonChong.net, where I provide updates on the property market in Singapore.