The Ultimate Decoupling Guide
Let us make a wild guess: you’ve come here because you and your spouse are seeking to purchase another home, but you’re doing all you can to avoid paying the dreaded Additional Buyer’s Stamp Duty (ABSD)—a tax placed on property buyers.
In your search for ways to avoid ABSD, you probably came across the term “decoupling” more than just a couple of times. While the term often dubbed a buzzword in the property market and is frequently used when discussing property ownership, few people understand exactly what it means and what it involves.
This article dissects the term and serves as the ultimate decoupling guide. We’ll cover the following:
What is decoupling?
Why do people decouple?
Things to take note of when decoupling
What is decoupling?
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If you look the word “decouple” up in the dictionary, to decouple is to separate, disengage, or dissociate (something) from something else. For this reason, many people have the misconception that divorce is associated with decoupling. Well, the good news is, no divorce is required for you to decouple!
Instead, decoupling is to divide the shared ownership of a property between a couple. Decoupling property is a legal process whereby you sell your share of the private property to the co-owner of the property. Ownership is then legally transferred and property becomes solely owned. Mortgage payments would then become solely taken up by one instead of the original two. To facilitate the process of decoupling, couples have to sign and submit requisite forms prepared by lawyers to the Singapore Land Authority.
The process of decoupling for HDB flats and decoupling for private properties differs—for married couples, only private properties can be jointly owned and subsequently decoupled. Married couples are not allowed to decouple their HDB flat. Decoupling for a HDB flat is only allowed for buy over from an ex-spouse or for the transfer of the flat between family members.
This distinction originated in 2016 when the HDB ownership transfer rule was made stricter. Following the tightened rule, only transfers under six special cases were allowed, namely: marriage, divorce, death of an owner, financial complications, renunciation of citizenship and medical reasons.
Why do people decouple?
As we mentioned briefly earlier, the people looking to decouple are mainly motivated by the fact that they can avoid paying fees like the ABSD, a tax that’s levied on top of Buyer’s Stamp Duty (a tax that property buyers have to pay when they buy a property).
ABSD is calculated based on the valuation or the selling price of the property, whichever is higher. The tax was first introduced in 2011 to manage the rising demand for property and to keep housing prices reasonable for Singaporeans.
ABSD applies to groups of people according to nationality and residency status:
Singapore Residents: ABSD will be levied on the second (12%) and subsequent property purchases
Singapore Permanent Residents (PRs): ABSD will be levied on all purchases. The first purchase will be 5% while second and subsequent purchases will be 15%
Foreigners: 20% ABSD for all property purchase
Companies or associations: 25% for each property
This will all be clearer with an example: Imagine you are a Singaporean citizen buying a $2 million property. You will be subjected to 12% ABSD.
ABSD would be $2 million x 12% = $240,000.
Decoupling is therefore used by people who would like to avoid having to pay ABSD. After decoupling, you’d be able to purchase a property as your ‘first’ one again.
Things to take note of when decoupling
By now, you should be wondering “Well, what’s the catch?” And you’re right. If decoupling accorded one with mere benefits, everyone would go ahead to decouple. The truth is, the process of decoupling isn’t that straightforward. There are many things to take note of during the process.
There are additional costs
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1. Legal fees
To manage the acquisition of property and the transfer of ownership, legal paperwork has to be completed. Conveyancing costs will be borne by the buyer. The seller, on the other hand, will need to hire an attorney to manage the transfer and sale of their portion of the property. In most cases, the two sets of lawyers will cost you about $6,000 to $7,000.
2. Buyer stamp duty
Buyer stamp duty are the tax payable upon acceptance of the Option to Purchase (OTP). Because the process of decoupling involves a sale of the share of the property from one party to the other, therefore Buyer Stamp Duty is payable during the process.
3. Seller stamp duty
If you embark on the process of decoupling within the first three years of the property purchase, you’ll need to account for Seller Stamp Duty. That’s 12% of the price in the first year, 8% in the second year, and 4% in the third year. If you’d like to avoid this, wait for at least three full years before decoupling. Do note that when a said property is “sold” from one owner to the other in the process of decoupling, the Seller Stamp Duty period starts all over again.
4. CPF refund
When you sell a property, you must return the amount you used from CPF with interest. After returning the amount, some people actually end up with zero cash. In some cases, their cash will be locked in their CPF and they do not have enough cash to pay for their next property.
In other words, careful financial planning is necessary before decoupling. The party taking over the property has to make sure that he or she has enough funds to take over the mortgage loan of the property! In addition, if bank loans are required, the party buying over the shares of the property should ensure their loan eligibility: they have to be able to borrow the required amount from the bank in order to take over the entire mortgage of the property.
5. Pre-payment penalties
This is a surprising fee for many people. As its name suggests, pre-payment penalties refer to a penalty fee that you have to pay for trying to pay off your home loan early. Typically, it is about 1.5% of the amount being prepaid. So, remember to check the terms and conditions of your home loan to avoid paying this fee.
You may end up paying more than saving
Sometimes, decoupling is not the economically sound route to take. This happens when the costs of decoupling is heavier than the ABSD cost. This is especially true if one of the spouse is a foreigner or if the second home you’re buying is less expensive than the first. In such instances, paying ABSD may be the best choice. Furthermore, for owners with several assets, decoupling may not be the best option.
Let us provide you with a concrete example:
Imagine that you are a Singaporean and your spouse is a foreigner and you currently co-own a condo with a value of $2 million and you decide to buy a second property at the value of $850,000.
In scenario A, you guys decide to decouple. Since the condo is worth $2 million, part purchase, or half of it would be $1 million. These are the costs involved:
BSD = (3% x $1,000,000) – $5400 = $24,600
Your spouse is a foreigner and he/she needs to pay ABSD = 20% x 1 million = $200,000
In the process, legal fees will be involved = $6,000
Assuming you have no pre-payment penalty, conveyancing fees and administrative fees will still prevail = $3,000
The total cost will come up to be more than $233,600.
Now, let’s see what happens in scenario B, where you guys decide to pay for the ABSD for the second, smaller property which costs $850,000.
ABSD = 20% (pegged to the person with a higher ABSD rate) x 850,000 = $170,000
In this particular scenario, it would make much more sense to pay for the ABSD, rather than decouple, if your reason for decoupling is to avoid the ABSD.
Mistakes can happen
Just like how we make careless mistakes during Math examinations, you can make mistakes when calculating ABSD and other fees that were mentioned above. Moreover, fees and percentages vary according to your residential status and nationality, adding on to the confusion that you may be faced with.
It is thus advisable to consult an experienced real estate consultant to help you to make the process of decoupling less daunting. They will be able to help you to work out your finances and settle the confusing calculations to advise you on what steps you can take based on your specific situation. Better yet, you’d be able to get advice from the professionals about how to decouple your properties to get the best returns.
To decouple or not to decouple?
Well, that is the ultimate question. While decoupling is undoubtedly a strategy employed by many couples to reduce the cost of their investments, some may find that the cons outweigh the pros in their specific situation. In these cases, they end up paying more to facilitate the process of decoupling. To avoid such real estate regrets (and going through a crazy amount of paperwork for nothing), be sure to consult a professional before making this great de