Buying out the wife on PPOR to become IP

S

SRB

I had been conditioned to believe if I wanted to upgrade I would need to sell our PPOR first however a suggestion was made to restructure our finance on our current PPOR by buying out my wife (not a divorce) and converting the current PPOR to an IP and then buying a new PPOR.

It sounds good in theory so here is our scenario.

Current PPOR value is $420k (previously we rented it at $440/wk but it was still out PPOR so not CGT payable)
Current mortgage is $210k in joint names
Suggestion is I borrow another $210k to buy out wife and convert current PPOR into my name as I am the highest income earner. Effectively this would also mean I have 100% finance on the PPOR ($420k mortgage). We then look for a new PPOR together under joint names and the old PPOR becomes an IP in my name only.

The bank say its easy and they would approve us under this new structure to buy another property at $550k using the $210k I paid the wife out with as a large deposit, so effectively we take out a $340k mortgage.

It sounds too good to be true to me, that I can finance at 100% under my name only and basically hold our current property as a close to cashflow neutral IP. We really dont want to sell it, because its a good house and its a bad time on the gold coast to sell.

Any thoughts / suggestions on if this is worthwhile, and also, anybody done something similar and know the costs involved - stamp duty etc (queensland)
 
STOP. Even putting aside the stamp duty or spousal sale question, there is no such thing as '100% finance'. What the bank is doing is taking the large equity in your PPOR, and using that to secure the new property. Now the bank holds both your securities under a very inefficient structure for you. The 100% finance is a misleading term and is code for cross collateralisation.
 
Classic advise from the bank and classic case of cross securitisation.

You may get your "100%" finance but set it up as a standalone facilities and do not link the properties.

Regards

Shahin
 
Thankyou for the advice. To be honest I had heard the term before but never knew what it really meant. I do not know if the bank are intending to structure the loan this way, but we intend to meet with the bank this week to discuss. I might insist they set up each as a stand alone or walk to another lender who will. I just dont know how strong a bargaining position I am in. My gross wage is around 105k and the wife around 30k if that helps with advice.

Anyone have advice on how to proceed with this? We would really like to keep our PPOR as an IP and buy another PPOR for around 550k.

So glad I put this scenario to the forum, I was just prepared to blindly follow the "good guys" at the bank .....
 
Do you really trust the bank to set it up for you correctly now even though they have given bad advice up till now? Seen plenty of clients ask for a non-crossed loan only to find out when docs are issued that they're crossed after all!
 
SRB said:
I had been conditioned to believe if I wanted to upgrade I would need to sell our PPOR first however a suggestion was made to restructure our finance on our current PPOR by buying out my wife (not a divorce) and converting the current PPOR to an IP and then buying a new PPOR.

It sounds good in theory so here is our scenario.

Current PPOR value is $420k (previously we rented it at $440/wk but it was still out PPOR so not CGT payable)
Current mortgage is $210k in joint names
Suggestion is I borrow another $210k to buy out wife and convert current PPOR into my name as I am the highest income earner. Effectively this would also mean I have 100% finance on the PPOR ($420k mortgage). We then look for a new PPOR together under joint names and the old PPOR becomes an IP in my name only.

The bank say its easy and they would approve us under this new structure to buy another property at $550k using the $210k I paid the wife out with as a large deposit, so effectively we take out a $340k mortgage.

It sounds too good to be true to me, that I can finance at 100% under my name only and basically hold our current property as a close to cashflow neutral IP. We really dont want to sell it, because its a good house and its a bad time on the gold coast to sell.

Any thoughts / suggestions on if this is worthwhile, and also, anybody done something similar and know the costs involved - stamp duty etc (queensland)
Click to expand...

Your figures are incorrect. Or correct, but..

You may get 100% finance but 100% of the loan would not be deductible.

Your house is worth $420,000 with a loan of $210,000
half each is $210,000 and $105,000

So if you borrowed $210,000 to buy your wife's share she would pay back her loan of $105,00. You overall tax deductible loan, if set up correctly, would be a around $105,000 + $210,000 = $315,000 or 75% LVR.

Still may be worth doing though.
 
I would seek clarification on what interest you can claim afterwards as well.

Current PPOR value is $420k in joint names.
Current loan is $210k in joint names.

You borrow $210k to buy out wife and convert current PPOR into your name. Actually you'd be paying some stamp duty too (unless in Vic) approx $6k by my calcs - might want to borrow this as well to maximize deductions. So lets say that you have a loan for $216k to purchase your wifes half and hence the interest on this is deductible when it becomes an IP.

The original loan was for $210k - and I would have thought it highly dubious that you could claim the purpose of that loan was for your half of the property only (as apposed to equally allocated between yourself and your wife). I would expect that the ATO's view might be that the $210k was jointly 50/50 for the property, and since your wife has now disposed of the property the interest on her half ($105k) is not deductible.

This is also assuming that you haven't contaminated the original loan by using redraw facilities on it .... Has your original loan have extra repayments and draw downs done on it?

Regards,

Jason
 
SRB said:
Thankyou for the advice. To be honest I had heard the term before but never knew what it really meant. I do not know if the bank are intending to structure the loan this way, but we intend to meet with the bank this week to discuss. I might insist they set up each as a stand alone or walk to another lender who will. I just dont know how strong a bargaining position I am in. My gross wage is around 105k and the wife around 30k if that helps with advice.

Anyone have advice on how to proceed with this? We would really like to keep our PPOR as an IP and buy another PPOR for around 550k.

So glad I put this scenario to the forum, I was just prepared to blindly follow the "good guys" at the bank .....
Click to expand...

How about contacting one of the brokers above who will structure the properties in your best interests rather than going to the bank who will do their best to convince you that their best interest is yours.
 
You shouldn't be taking advice from the bank on this either, other than would they approve a loan of $x.

You and wife should seek legal advice as there are far reaching consequences. If you set this up incorrectly, such as a transfer for other than market value, then you will not be able to claim any additional interest.

You will need advice on:
1. Taxation issues and general
2. will ATO be able to deny deduction
3. Loan issues such as serviceability
4. Structuring loan without cross collateralising
5. Estate planning issues
6. Asset protection issues
7. Conveyancing issues
8. Land tax issues
9. Stamp duty issues
etc
 
Until about 24 hours ago I had never even considered "structuring" anything. I am so glad I put this up to the forum because it sounded great in theory but just sounded too good to be true .... and it was.

So do I need a broker, lawyer or an accountant to give me advice with this, help me set up a structure and explain the stamp duty and tax implications?

Would a family trust help?

Thanks for sharing your knowledge everyone, I am way over my head with this as you may have guessed.
 
SRB said:
Until about 24 hours ago I had never even considered "structuring" anything. I am so glad I put this up to the forum because it sounded great in theory but just sounded too good to be true .... and it was.

So do I need a broker, lawyer or an accountant to give me advice with this, help me set up a structure and explain the stamp duty and tax implications?

Would a family trust help?

Thanks for sharing your knowledge everyone, I am way over my head with this as you may have guessed.
Click to expand...

You would need a lawyer who knows tax laws. And a broker.
A family trust may or may not assist depending on your situation.
 
SRB said:
Thankyou for the advice. To be honest I had heard the term before but never knew what it really meant. I do not know if the bank are intending to structure the loan this way, but we intend to meet with the bank this week to discuss. I might insist they set up each as a stand alone or walk to another lender who will. I just dont know how strong a bargaining position I am in. My gross wage is around 105k and the wife around 30k if that helps with advice.

Anyone have advice on how to proceed with this? We would really like to keep our PPOR as an IP and buy another PPOR for around 550k.

So glad I put this scenario to the forum, I was just prepared to blindly follow the "good guys" at the bank .....
Click to expand...

Its in the banks interested to tangle you as much as possible making it more difficult for you to leave them and give them more control of your assets.

Whatever you do don't cross securitise the properties.

Regards

Shahin
 
Thankyou all. It would mean a lot to us to be able to keep the current PPOR as an IP but given we have paid off half of it the tax concessions will be miserable and we would end up with a lot of non deductible debt. Its a real catch isnt it - you pay more into your mortgage thinking it gets you ahead but in reality it has restricted us financially .... had it been in an offset account we would have been fine and able to just use the cash for the next PPOR and the current mortgage would have been tax deductible.

Maybe I should just go and rent and have two IP'S.:cool::cool:
 
SRB,

It is not the end of the world, you are still doing very well with your investments and knew enough that you could have had a potential problem.

90% of people would have no idea and many just increase the investment loan and move the cash over to the new home loan and start claiming the interest.
 
Well after a few late nights studying websites on tax I have come to a decision. I probably should have mentioned in my original post I have had a LOC loan against my PPOR from 2010 when it was still an IP. I had intended to use the LOC to buy shares or cattle but never went through with either, it has been sitting there pretty much unused for two years. It had never occurred to me it was just as capable of being used to buy another IP ..... DDD-UUHHHH.

The new plan, and I open this up to all for comment and advice, is -

Current PPOR worth 420k, loan of 210k which has an offset facility, and a LOC of 120k. Intention is to move out of PPOR and rent in closer to work.

I will use that LOC to fund at least a 20% deposit (no mortgage insurance) on an IP which I am currently in negotiations on a couple valued 450-500k.

I have given away the ideas of who buys what in who's name with the wife, after putting numbers through various calculators it makes bugger all difference really, and is far less complicated, so its 50/50 splits. Also, in the future, her wage is likely to increase anyway.

If I have understood things better now, I will then be able to claim the interest on all of these loans 100% as tax deductible.

I will maintain the offset on the original 210k loan on the PPOR and all income (wages and rent) will be directed into that offset. When we feel the time is right we will either acquire another IP or PPOR using (hopefully) all that money we have in the offset.

Have I got this right yet?
 
SRB said:
I have given away the ideas of who buys what in who's name with the wife, after putting numbers through various calculators it makes bugger all difference really, and is far less complicated, so its 50/50 splits. Also, in the future, her wage is likely to increase anyway.
Click to expand...

Buying in joint names is my biggest investment regret.

I have very different investment goals to my husband and want to purchase properties in my own name. Even though we split the repayments 50/50 on our joint investments, when it comes to servicing the banks consider each of us liable for the full amount, but only take into consideration half the rent.

I would give it some thought and make sure you are both on the same page in terms of your long term investment goals.
 
I've got the same problem. Deciding whether or not to sell or refinance and keep a jointly owned PPOR.

I'm thinking that the best idea really is just to sell, and use the cash for other things. Our loan is about 30% of the value of the property. This rejiggering thing seems heinously complicated and comes with nasty tax implications.
 
Nemo30 said:
Buying in joint names is my biggest investment regret.

I have very different investment goals to my husband and want to purchase properties in my own name. Even though we split the repayments 50/50 on our joint investments, when it comes to servicing the banks consider each of us liable for the full amount, but only take into consideration half the rent.

I would give it some thought and make sure you are both on the same page in terms of your long term investment goals.
Click to expand...

I am lucky Nemo, my wife is very on board with me and happy to leave the decisions up to me, we are a team and she gets behind me trying to make a life for our family. Believe it or not, I actually made an offer on three properties (PPOR!!) before without her seeing them .... and she fully supports me doing it again.

Stuffing around with who claims what to me is not that important. Whilst I want to maximise good (deductible) debt, I am not that interested in maximising negative gearing. Losing enough money in this market to have big tax write offs means you are doing it wrong, in my opinion.

Just happy to poke along, start a portfolio, and build wealth slowly over time and keep things simple.
 
RumpledElf said:
I've got the same problem. Deciding whether or not to sell or refinance and keep a jointly owned PPOR.

I'm thinking that the best idea really is just to sell, and use the cash for other things. Our loan is about 30% of the value of the property. This rejiggering thing seems heinously complicated and comes with nasty tax implications.
Click to expand...

We owned three houses in the NT before the booms of 2004 onwards, we sold them all before that for very little gains, that seemed good at the time. I have regretted selling those properties every day ever since, I would be a very wealthy man had I just held onto them - they were positively geared when I sold them, so really, I didnt have to, but back then didnt fully understand the wealth creation strategies of buying and holding.

Anyway, we have decided now to sell only if we have to. We want to hold on and build slowly, we wont ever have the growth we missed out previously again, but also know that greed is a bad thing when it comes to short term easy money.

I have found a lot of the stories of investors on this forum so inspiring, some are just simple folk that worked hard and just slowly added to their portfolios to become very comfortable.
 
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