Can you negatively gear the increased equity in an IP....?

[qonyx_sydney]

Hi,

Ok so my question is as follows - all made up numbers

You buy a house for 200k in 2005
It is now worth 400k in 2014
You re-finance the loan so that you now have access to the 400k
You are now paying interest on the 400k

Are there any structures available that would allow you to negatively gear 400k

I know of some people that are doing this now but i believe that this is not legal and if they are caught by the tax man that they could have some answering to do....

Unless of course they are doing legal restructuring in the background that would allow them to do this...

Interested in people's experiences here...

Regards,
Q

 

[Jamie M]

Hi Q

It depends on the "purpose" of that loan increase.

If you spend it on deductible purposes than you can claim on it.

If it's being used for personal - then nope.

Cheers

Jamie

 

[james55]

Just thinking out loud here. Can the purpose be to lend to your trust with interest and then the trust lends the funds back to you ?

 

[Scott No Mates]

Is the bank going to allow you to draw the equity for you to recycle in that way? Are you looking at a LOC? As advised by others countless times on the forum, it all depends upon the purpose of the loan as to the tax treatment

 

[Terry_w]

Just thinking out loud here. Can the purpose be to lend to your trust with interest and then the trust lends the funds back to you ?

Yes, but that won't change anything.

 

[Terry_w]

It is not only the purpose but the use the money is put to.

So if you increase the loans and the funds are used to buy an investment property then the interest would be deductible. But if you increase the loan and the funds are used to pay down no deductible debt such as the PPOR the interest on this money won't be deductible.

Strategies to improve deductibility include:
1. Sell, use proceeds to pay down non deductible debt and then reborrow to rebuy
2. Sell to spouse who borrows to buy - generally less costs and you can retain property.
3. Sell to a related party such as a trust - many issues
4. Debt recycle by borrowing to invest and use excess income generated to pay down PPOR debt
5. Debt recycle by borrowing to pay investment expenses and use the cash you would have used for these expenses to pay down the PPOR loan.

 

[Paul@PFI]

Hi,

Ok so my question is as follows - all made up numbers

You buy a house for 200k in 2005
It is now worth 400k in 2014
You re-finance the loan so that you now have access to the 400k
You are now paying interest on the 400k

Are there any structures available that would allow you to negatively gear 400k

I know of some people that are doing this now but i believe that this is not legal and if they are caught by the tax man that they could have some answering to do....

Unless of course they are doing legal restructuring in the background that would allow them to do this...

Interested in people's experiences here...

Regards,
Q

There are instances when you can refinance that same IP and increase deductions without buying a new property. Common example is :
1. Trust refinance of unitholders using the refinance principal; and
2. Changing ownership between spouses.

In its simplest form think of your own home. Worth $400 and cost $200 and debt is $100. Owner is 100% you. In some states there is a stamp duty concession that may allow this to become 50/50 TIC with spouse. So your wife borrows $200 and buys 50% of the house. Now loan is $300K....No duty and maybe even no CGT....How then does the deduction increase ??? Well lets assume you are both about to move into a new PPOR....And what do you do with the $200 your wife gives you ??? You use it repay $200 on the new PPOR..

So non-deductible use is now tax deductible. Negative gearing benefits increased. Net debt hasn't changed. Change of owner - Yes. Revised cost base mean future CGT is reduced too (as its now CGT taxable). Minor legal costs involved....Maybe discounted if you use my legal guy to do the loan increase.

That the refinance principle in a nutshell.

Personal advice is a must.

 

[+Mpire_Builder+]

Just thinking out loud here. Can the purpose be to lend to your trust with interest and then the trust lends the funds back to you ?

Terry was spot on here, will not change anything.

Slightly different strategy here which doesnt relate to refinancing the property, is when the trust can borrow against other assets in the trust, ie refinancing a property IN the trust to pay out balances owed to beneficiaries, which have been building as a result of distributions not drawn (with funds utilised elsewhere) over time. This interest would be deductible and a good way to release funds if equity is not available outside of the trust.

Way to utilise the funds by keeping it deductible against this asset, would be to sell one spouses half to the other (at MV).
PP $200K
MV $400K
Each spouses equity $100K

CGT aside, if it was main residence, then you could do a spouse transfer. One would then own 100% of the property with a new cost base of $300K, thus creating an additional $100K of deductible loans.

If it was owned 100% by one spouse then it could be sold at MV for $400K and get the entire uplift in equity and the full 400K in loan, up from 200K.
As for this situation, it would just be a case of being deductible in A and assessable in B, net result ZERO.

Coming back to the topic of the thread,
1. strictly speaking, no the additional 200K is not related to that asset and would not be deductible (unless you used the funds to renovate that place haha)
2. As others mentioned, deductibility of the $200K would then depend on the purpose to which it was used. Investment, holiday to Bali etc etc

3. Regardless, I would either get a line of credit for the $200k or a split on the loan, just so its not tainted.

DZ

 

[s0805]

4. Debt recycle by borrowing to invest and use excess income generated to pay down PPOR debt
5. Debt recycle by borrowing to pay investment expenses and use the cash you would have used for these expenses to pay down the PPOR loan.

Borrow to pay investment expense....and put cash for non deductible debt. Terry, what investment costs you are referring to here....could this be capitalizing interest? Trying to understand difference between 4. & 5.

 

[s0805]

In its simplest form think of your own home. Worth $400 and cost $200 and debt is $100. Owner is 100% you. In some states there is a stamp duty concession that may allow this to become 50/50 TIC with spouse. So your wife borrows $200 and buys 50% of the house. Now loan is $300K....No duty and maybe even no CGT....How then does the deduction increase ??? Well lets assume you are both about to move into a new PPOR....And what do you do with the $200 your wife gives you ??? You use it repay $200 on the new PPOR..

One observation with this i think is if OP is trying to build further portfolio, by going 50/50 TIC with spouse on this lender will assess the entire borrowed value against both spouses serviceability......is that right?...OP can always sell the property to spouse rather than 50/50 TIC to improve his serviceability.....

Revised cost base mean future CGT is reduced too (as its now CGT taxable). Minor legal costs involved....Maybe discounted if you use my legal guy to do the loan increase.

This is something i never thought of....good to know..thanks Paul.

 

[Terry_w]

Borrow to pay investment expense....and put cash for non deductible debt. Terry, what investment costs you are referring to here....could this be capitalizing interest? Trying to understand difference between 4. & 5.

Borrowing to invest - e.g. high dividend shares. pay the interest, left over returns goes into home loan. Periodically sell and use capital gainst to down home loan

Borrow to pay investment expenses. e.g. council rates.

I don't suggest interest be left to capitalise without getting tax advcie.

 

[Terry_w]

Terry was spot on here, will not change anything.

Slightly different strategy here which doesnt relate to refinancing the property, is when the trust can borrow against other assets in the trust, ie refinancing a property IN the trust to pay out balances owed to beneficiaries, which have been building as a result of distributions not drawn (with funds utilised elsewhere) over time. This interest would be deductible and a good way to release funds if equity is not available outside of the trust.

DZ - do you have any authority to back this up. Trustee borrowing to pay a distribution. I cant see how this would be deductible as it doesn't relate to the production of assessable income under s8-1.

 

[VernSilver]

If you have a proper asset protection / company set up for each property you buy then you can withdraw the equity from one property trust and lend it to another trust as a deposit for your next property.
However as far as I know you can't negatively gear trust assets / income so the only possibility might be to borrow the equity from your PPR and lend that to a trust etc... Check this youtube video: https://www.youtube.com/watch?v=WCj23l79TSQ Ask your strategist and accountant about whether you can get away with a equity loan as part of your recorded "loss", but you'll definitely need to legally distance yourself from the structure where the money is going.

 

[Terry_w]

If you have a proper asset protection / company set up for each property you buy then you can withdraw the equity from one property trust and lend it to another trust as a deposit for your next property.
However as far as I know you can't negatively gear trust assets / income so the only possibility might be to borrow the equity from your PPR and lend that to a trust etc... Check this youtube video: https://www.youtube.com/watch?v=WCj23l79TSQ Ask your strategist and accountant about whether you can get away with a equity loan as part of your recorded "loss", but you'll definitely need to legally distance yourself from the structure where the money is going.

Setting up a property or a trust doesn't equate to asset protection. I have seen a fair few structures which would fold easily on insolvency of the person behind them.

'You' cannot negtiavely gear trust income just as you cannot negatively gear the income of donald trump. But trusts can negatively gear like any tax payer.

You cannot borrow the equity of a property either. What you can do is to borrow secured against a property you own and then lend this to a trust. But the interest will not be deductible and there is little asset protection at all.

Best to avoid 'strategists' too as they are not qualified or licenced to give asset protection advice unless they hold practicing certificates as lawyers.