Buying through a trust

[Bobq]

I'm about to purchase a property through a trust and will loan the trust the 30% plus costs. Question: if the trust pays back principal and interest, is the principal payable back "tax free"?

My thinking is that it is not income for me - I loaned it; it is not a distribution, it's a repayment, and it's not retained and therefore taxable at the trustee's marginal rate.

Anyone care for a shot at this?


Bob

 

[DaleGG]

Hi Bob

Originally posted by Bobq
I'm about to purchase a property through a trust and will loan the trust the 30% plus costs. Question: if the trust pays back principal and interest, is the principal payable back "tax free"?

My thinking is that it is not income for me - I loaned it; it is not a distribution, it's a repayment, and it's not retained and therefore taxable at the trustee's marginal rate.

Anyone care for a shot at this?


Bob

Under the current laws, yes, the principle repayments are tax free to you as your loan is being repaid.

Have fun

Dale

 

[Bobq]

OK, let's get trickier - and those who don't like interest-only loans should pay careful attention.

This one is strictly hypothetical, but suppose my trust borrows (say) 70% from the bank and gets the rest as vendor finance. Can it then pay back the vendor (and/or the bank) their principal from pre tax dollars? If so, a trust seems to be the perfect vehicle for P&I loans as you don't pay back your equity from after tax dollars.

(Obviously you might have to get a bit more aggressive if you wanted to try it on for your PPOR - I don't think that I'd take it that far.)

Bob

PS Dale, guess whose book on tax battles is my preferred night time reading at the moment? Free-plugz-R-us

 

[DaleGG]

Hi Bob

Originally posted by Bobq
OK, let's get trickier - and those who don't like interest-only loans should pay careful attention.

This one is strictly hypothetical, but suppose my trust borrows (say) 70% from the bank and gets the rest as vendor finance. Can it then pay back the vendor (and/or the bank) their principal from pre tax dollars? If so, a trust seems to be the perfect vehicle for P&I loans as you don't pay back your equity from after tax dollars.

(Obviously you might have to get a bit more aggressive if you wanted to try it on for your PPOR - I don't think that I'd take it that far.)

Yes and no. The trust uses it's disposal cashflow to repay the loans, however, the principle part of the repayment is not a tax deduction I am afraid.

Bummer, huh?

Have fun and thank you for your kind words

Dale

 

[Bobq]

Dale,

I don't quite understand.

Example: Trust earns $10,000 after expenses (including interest and depreciation). Trust makes a distribution of $6500 to my non-earning spouse, $640 to each of my two children and the remainder goes to paying off principle. Is any tax payable?

If not, it seems to me that the payment of principle is from pre tax dollars. Or is it considered retained income and taxed at the trustee's marginal rate? I want to know as although I'm not a great one for paying off principle, it may be a useful tool for utilising shorter term debt (like vendor financing).

Regards,

Bob

 

[DaleGG]

Originally posted by Bobq
Dale,

I don't quite understand.

Example: Trust earns $10,000 after expenses (including interest and depreciation). Trust makes a distribution of $6500 to my non-earning spouse, $640 to each of my two children and the remainder goes to paying off principle. Is any tax payable?

If not, it seems to me that the payment of principle is from pre tax dollars. Or is it considered retained income and taxed at the trustee's marginal rate? I want to know as although I'm not a great one for paying off principle, it may be a useful tool for utilising shorter term debt (like vendor financing).
Regards,
Bob

Hi Bob

The trust does not pay tax at all unless you do not distribute income. So, if you have the above situation, the trust will pay no tax and neither will you wife or children if they have no other income.

If the distribution is by book entry and not by cheque, then the trust has no tax to pay, and, still has the $10k still in the bank to use to pay off debt.

Does this help

Dale

 

[Donna L]

Trust issues continued

If I understand you what you are saying is that you don't actually take the money out of the bank to pay the distributions, you just pay it off the loan as a principal repayment. However, the wife and the children, theoretically, are entitled to draw that money "owed" to them at any time in the future when funds are available. They have essentially continued to loan their entitlement to the Trust. Is this what you mean?

 

[Donna L]

Postscript

In the above example, $10k income, $6.4k to spouse, $1280 to kids, that leaves $3k odd undistributed income (taxable?) or is the loan repayment an expense? Wouldn't you have to distribute the whole $10k but not take the money in which case the left-over $3k would be taxable to the benficiary??

 

[Bobq]

Dale,

You bet it helps! Another string for the bow!

Bob.