What is Decoupling and how to use it to accumulate Property Wealth in SG?

When it comes to property restructuring, decoupling is one of the most commonly used strategy to allow a Singaporean household to own a second property without paying Additional Buyer's Stamp Duty (ABSD).

Objectives of Decoupling

There are 2 primary reasons for using decoupling for wealth accumulation:

First, it is to remove ownership of one party from the property so that his/her property count gets reset to zero. In a typical scenario, the husband and wife would purchase their matrimonial home under 50/50 ownership (in technical speak - under "joint tenancy"), so both parties have equal share in the property which means they are both co-owners and they are likely to be co-borrowers as well. By removing either one party from the property, it means the removed party would cease to become both the co-owner and co-borrower of the property. Thus, the removed party will be able to acquire another property without having to incur ABSD as his / her property count has been reset to zero.

Second, it allows for the co-owners of the house to cash out profits from their property without selling it. During the decoupling process, a valuation report has to be obtained from the property. If the property is purchased at $800,000 initially, and the valuation has appreciated to $1.2 million, the $400,000 profit will be realised as the new home loan taken by the remaining party within the property will be based on this new valuation of $1.2 million. Thus, the remaining party in the property will have a larger loan quantum than before on the pre-text that the home value has appreciated. The additional cash obtained can be used to offset the removed party's share of outstanding loan, and double-up as reserve funds for the second property. I will be illustrating this using a mathematical example in the section "Decoupling Calculation Exercise".

Eligibility Criteria for Decoupling

Currently, this decoupling strategy may apply only for Executive Condominium (EC) owners who have fulfilled their 5-year minimum occupation period (MOP) as well as Private Property owners. For Private Property owners, I would advise to perform the decoupling 3 years from the Option-to-Purchase (OTP) date or the Sale & Purchase (S&P) date, whichever is earlier, to avoid paying the Seller's Stamp Duty (SSD).

For HDB owners, the government has tightened the requirements for decoupling from 1st April 2016, and it is only allowable under very specific situations: marriage, divorce, death of owner, financial hardship, loss of citizenship and medical grounds. Therefore, it would not be possible to use decoupling strategy on the basis of wealth accumulation for HDB owners.

Decoupling Calculation Exercise

John and Jenny own Bedok Residences (Private Property). The property was held under both their names under joint tenancy (50-50 share). John would like to remove Jenny's name from the property in order for Jenny to buy another property without paying ABSD. The original purchase price was $800K and their current outstanding loan is $400K. John has 100K in his CPF Ordinary Account. The new valuation of the property is $1.2 million.

What is the decoupling calculation involved?

First, we need to determine John's cash or CPF requirement to acquire Jenny's share of the property.

Valuation of property = $1.2 million (John's share = 600K, Jenny's share = 600K)

When John acquires Jenny's share of the property (i.e. 600K), John would have to pay 25% of the 600K in cash or CPF (i.e. 150K). To be precise, John has to pay 5% option fee in cash (i.e. 30K) and 20% exercise fee in cash or CPF (i.e. 120K). John can use the 100K in his CPF to partially offset this exercise fee. As such, he may need only 50K in cash to perform this decoupling strategy.

Second, we need to determine John's upsized loan quantum.

Outstanding Loan of property = $400K (John's Loan = 200K, Jenny's Loan = 200K)

John's initial share of the property outstanding loan is 200K. With the decoupling strategy, John's loan quantum will be upsized to 650K which comprises the initial loan of 200K and the new loan of 450K (since 75% of the 600K of Jenny's share can be taken out as loan)

Third, we need to determine the cash and CPF return for Jenny.

When John acquired Jenny's share of the property at 600K. The 600K will first be used to offset her share of outstanding loan which is $200K and the subsequent $400K will be first returned to Jenny in her CPF and the remaining amount returned in cash. It is noteworthy that the 400K in cash and CPF can be used as downpayment for the second property. Assuming Jenny qualifies for maximum loan (75%), the 400K "war-chest" can be used to buy a property that is worth up to $1.6m.

Key TakeAways from the Decoupling Calculation

The common misconception for many people is that they need a lot of cash on hand to decouple. In the above case study, John didn't have to fork out the full 600K for the decoupling. In fact, John only needed 150K which is 25% of Jenny's share of the property which can be partially offset by his existing CPF funds. With the additional funds disbursed to Jenny in the form of cash and CPF after the discharge of her portion of the housing loan on the first property, Jenny would have sufficient funds to buy a second property.

Subsequently, either one of the 2 properties can subsequently be rented out to earn passive income. As such, decoupling is a strategy to grow your property wealth without incurring ABSD, yet generates passive income via rental income from either one of the 2 properties.

Disclaimer: The information provided in this article does not constitute any provision of legal advice and is based on certain implicit assumptions.