Gary
Reply: 1.2.1.1.1.1.1.1.1
From: Mike .
Re: RENTING OUT THE OLD HOUSE
From: Gary
Date: 8/15/00
Time: 10:11:18 AM
The first thing you need to do is to educate yourself on trusts and companies, and their advantages and disadvantages. No one can tell which is 'best' - you have to look at all the sides and make the decision on what is best for you.
There is a book called 'Family Trusts' by Nick Renton. Buy a copy and read it carefully. Some of the details are out of date - there have been a lot of changes to the trust laws recently (and if the labour party wins the next election it looks like there will be more to come) but it will give you on overview of what trusts are, how they work and whether or not they may be of use to you.
I think you also need to consider your long term needs. Don't get caught up in a short term strategy to save some tax unless there are also long term benefits, and I'm not talking just about tax here. Rush into a solution today to get around your current 'problem' and you might find yourself with a bigger problem 5 or 10 years down the track.
Consider carefully how far you are prepared to push the tax laws. Personally, I think the long term certainty of having my tax affairs (reasonably) beyond challenge by the tax office is worth a lot more than the temporary saving of some tax dollars.
If an accountant/tax planner suggests something than sounds dodgy to you, get a second opinion, or better still, a private ruling. Just because an accountant says you can do something doesn't mean you can. The best they can do is offer an opinion on what the tax office's opinion will be - you won't find out if that opinion is right until later if you get audited. Use the ATO internet site and search through their legal database of past cases and rulings. Hey it isn't fun, but knowledge is important.
As for your present situation, if it was me I would be selling your present house and using the money to buy your next house with that money. Then borrow against that to buy another house to rent out. Unless there is something really special about your present house that makes it much better as a rental house than anything else you can find.
The disadvantages are that you will have to pay selling costs and buying costs on the new house. The advantages are that it is beyond challenge by the tax office and all your borrowings will then be tax-deductible. As for a trust, the only thing I can be sure about is that you presently don't know enough about them to make an informed decision.
I don't know the borrowing level for your other two rental houses. But to be tax-effective the trust has to be at worst cash-flow neutral - having a trust or company that loses money is not a good idea. But again you need to look at the long term picture. If you look into trusts and decide that long term it is the right thing for you, then you may be prepared to pay extra in the short term for the long term benefits.
Paying more tax for the next 5 years and then paying less for the 40 years after that is probably a good deal. Realise that your situation may change in later years in a way that you may not realise now. Try to be as flexible as possible.
Gary
