Convert PPOR to IP - husband buys wife out

[Terryw]

There are clawback provisions under the bankruptcy act - longer claw backs for undervalue transactions.

Decutibility depends on what the money borrowed is used for. So if you have a $1 transfer and then borrow $300,000 to pay your spouse it could be that only the interest on the $1 of this is deductible and the rest is a gift.

So market value transfers should be done - and this shouldn't affect the stam duty exemption in VIC when between spouses - I think.

 

[Aaron_C]

I am surprised more people in VIC don't do this (no not tennis but transferring between spouses).

Simply lack of awareness methinks.

 

[ozgal]

Hi Terry,

Thanks so much for clearing that up.

 

[Dazz]

Hi ozgal,


We did exactly the same about 12 years ago with our PPoR.


Wife owned the PPoR in her name only whilst we lived there. Moved out, I bought her out - for full market value and paid stamp duty cos we are in WA and don't have the good laws you seem to have in Vic.

Took full loan out to buy the house, which was now an IP. Officially gave the cash to the wife from the sale, who then used it to pay off a large slab of the loan against another IP that we moved into and made our PPoR.

Tax office is cool with it.

CGT was payable by the wife, but because she was a stay at home mum, the tax was minimal.

Tactic works really well. One of the best ways we could give ourselves a boost in 2 good ways ;

• Convert a bunch of non-tax deductable debt into tax deductable debt
• Eliminate a bunch of non tax deductable debt on our new PPoR
• Increase our lifestyle by living in the upgraded home in a better area.

The cost was stamp duty & CGT. The breakeven point on this sum of money outlaid vs the tax savings, amounted to 7 months. The subsequent 11 years plus has all been gravy.


IMO, your plan is a good one.


My only concern for you ozgal, is a million dollar asset providing a low 3.5% gross yield, probably about 3.0% when all outgoings are taken into consideration.

With those types of numbers, combined with your crazy notion of buying another one.....saddled against your husband's desire to give up work in the next decade. Something ain't right.

I'm getting the feeling you are going to fall into the trap of most Aussie investors where stating you own X amount of properties is the main goal, rather than looking for quality properties, sensibly fiannced, that stand on their own two feet cashflow wise, such that your husband doesn't have to negatively gear his little sox off for the next 10 years, crossing his fingers and hoping Melbourne residential property will keep going up.

If it doesn't, your plan is cactus.

How many dead albatross do you really wish to sling around your neck and lug around with you ?? They get heavy after a while....

 

[ozgal]

Hi Dazza,

I'm not sure I see the difference between your situation and ours.

Our situation: The house we live in is jointly owned worth around $1 mill (with $90k loan). Husband buys me out ($545) by paying me 50%. No stamp duty as in Vic. Husband will then have sole ownership of property with LVR of 50% (current high income, so will have negative gearing benefit - not that NG is one of our huge goals, just a side benefit).

Your situation: You bought your wife out but you had to pay for 100% of the property plus stamp duty (bummer about the SD).

Up to this point both situations look very similar to me. In your case, however, you already had two properties at that time (PPOR and IP).

You did, however, use the funds released from PPOR buy-out to pay down a chunk off your IP, which had become your newly nominated PPOR.

I think I must be missing something here, Dazza, as I'm not sure I see any difference to what you did and what we plan to do.

Is it that our PPOR is worth $1 mil and does not get a good enough return if rented out at $700 pw? Or is there something else I'm missing?

Also, I'm not sure of the exact sequence we should follow, i.e. if we do the buy-out, once the funds come through to me, husband will need to pay interest on that loan (IO with offset account). That's when we need to rent the property out.

We also need to purchase the new PPOR so we have somewhere to live.

We definitely don't want to lug any dead albatross around and greatest number of properties is not what we are after. We just want to make the best decisions possible with our current mix, i.e. PPOR in excellent inner city location in Melbourne, high income for the next few years, and a desire to upgrade our living conditions to small country acreage.

Hope to hear your further thoughts, Dazza, on smarter way to proceed, converting PPOR to IP/purchasing new PPOR in country.

Many thanks.

 

[ozgal]

Hi again Dazza,

How come your wife had to pay CGT on the sale of the original PPOR to you? Was this because she had already nominated the IP you moved into as her new PPOR?

 

[Aaron_C]

Dazz is questioning why you want to build a portfolio of residential investment properties as opposed to something that produces more cashflow and which is less biased against you - such as commercial property.

 

[Terryw]

Also, I'm not sure of the exact sequence we should follow, i.e. if we do the buy-out, once the funds come through to me, husband will need to pay interest on that loan (IO with offset account). That's when we need to rent the property out.

.

you might have to lend him some money

 

[Terryw]

Thinking a bit more about this.....

In VIC there are huge potential benefits of having the marital home owned by one spouse. Many people decide to move out of their home at some stage to upgrade to something bigger. This gives a great opportunity for a couple to have the non owner purchase the property from the owner and gear to do so. This could possibly be done without stamp duty or CGT and could result in huge tax savings.

Something worth considering - even if the stamp duty may be payable it may still be worth it.

 

[Dazz]

How come your wife had to pay CGT on the sale of the original PPOR to you? Was this because she had already nominated the IP you moved into as her new PPOR?

OKey dokey,

Chock full of red wine so here goes nuthin.....memory clouded by both wine and time, but I'll have a crack for ya.

Your suggestion and what we did it nearly identical.

Former PPoR owned 100% by wife.....bought for 100K worth say 180K.
Former IP owned 100% by me......bought for 400K worth say 700K.

Moved out of former PPoR in mid '01 and into IP.

I take a loan out and borrow 180K from the Bank to buy wife's property, the former PPoR.

Wife did not pay CGT.

Pay WA stamp duty....can't remember how much, but about 20K. I was happy to pay over odds, it would have meant slightly higher duties payable, but would have been able to shuffle more debt from NTD into TD. State Revenue Office did check sale price against valuation figures they had on hand that they matched up and they didn't get stiffed. No wurries.

I officially pay the money to the wife on settlement.

She uses the money plus a bit of our spare cash to buy about 60% of my former IP, now our PPoR. Now I own 40% of our PPoR. She owns 60%.

I pay CGT on the 60% sale. I cocked that bit up on my last post.

The cash injection from the wife is enough, along with sale of some shares, to eliminate our 400K mortgage on the PPoR.

End result, we leapfrog from a small fully paid off PPoR into a large fully paid off PPoR, and loaded up an IP chock full of investment debt.


The biggest difference between our situation and yours ozgal is the price and yield of the asset. With the former PPoR totally loaded up with 100% debt, the rent received was still able pay for itself.

Your former home, even with a little debt of about ± 50% is not able to stand on it's own two feet.

Obviously it's your choice what you do, but your life position doesn't seem to suit being the indebted Landlord of some beautiful albatross in some swanky suburb in Melbourne.

I reckon you'd be a lot closer to freedom if you sold the asset, rented wherever and whatever tickled your fancy, and pumped all of your equity into high yielding investment grade property in the Melbourne CBD, where you could get stable rents from a BHP or a Govt Tenant at 9 or 10% yield, and they'd pick up all of the outgoing costs for you.

That way, you wouldn't have to have your husband flog himself stupid for the next 10 years to prop up the lifestyle of your Prahran tenants.

Calculate the numbers for both scenarios and make an informed decision. That's stage 2 of course. Stage 1 is to simply get your equity out of the Prahran asset, which I agree with completely.

Totally up to you.

 

[BMan]

There are clawback provisions under the bankruptcy act - longer claw backs for undervalue transactions.

Decutibility depends on what the money borrowed is used for. So if you have a $1 transfer and then borrow $300,000 to pay your spouse it could be that only the interest on the $1 of this is deductible and the rest is a gift.

So market value transfers should be done - and this shouldn't affect the stam duty exemption in VIC when between spouses - I think.

wouldnt it then be better to pay more than market value to get a bigger loan (if you could)

 

[Terryw]

wouldnt it then be better to pay more than market value to get a bigger loan (if you could)

if you could!

Problems possibly:
- Market value substitution rules in tax act
- valuations from lender may not come up high enough.

You could encourage the valuer though.

 

[Ergophobia]

Why even sell? Wouldn't it be simpler to just use the house as security for a loan?

 

[Terryw]

Why even sell? Wouldn't it be simpler to just use the house as security for a loan?

To convert non-deductible debt into deductible and thereby save a crap load of tax.

 

[Aaron_C]

Why even sell? Wouldn't it be simpler to just use the house as security for a loan?

No because you want to get the maximum tax benefit and/or asset protection.

 

[Ergophobia]

To convert non-deductible debt into deductible and thereby save a crap load of tax.

But if the loan is used to buy an income producing asset, it's still deductable...

No because you want to get the maximum tax benefit and/or asset protection.

Hubby is self employed... Wouldn't the wife have less risk?

 

[Terryw]

But if the loan is used to buy an income producing asset, it's still deductable...

Unless I am getting threads mixed up again I think they want to buy a new PPOR so in this case the new loan wouldn't be deductible.

 

[Ergophobia]

Unless I am getting threads mixed up again I think they want to buy a new PPOR so in this case the new loan wouldn't be deductible.

Ahh... I think I'm the one getting mixed up.

 

[chindonly]

Hi Ozgal,

We are looking at almost the exact same scenario, so good to see some confirmation by others of the strategy we intend to use.

We do have some emotional attachment to the PPOR so our preference is not to sell outright to others.

At the moment, my accountant believes it is doable, but may get a 2nd opinion.

Good luck with it all!

 

[Aaron_C]

If anyone is worried about Part IVA the test is the 'dominant purpose' of the 'scheme'. If it's obviously a way to minimise tax then you will be in trouble. But if there's another important reason for it - like protecting the family home - it would be easier to justify. This would mean nothing in writing specifying the reason for the transaction is to 'save tax'. Everything documented should detail how you are doing it for asset protection etc etc.