IP Loan Setup

[Brett IP]

Hi

This is a follow on from a prior thread under "Accounting & Tax". My wife & I have a contaminated 320k loan on our PPOR, which we are turning in to an IP ASAP.

Property Value = $460k
Loan = $320k

As we cant claim any of the loan we are contemplating going down the path whereby I purchase my wifes 50% share so I can atleast claim the interest on $230k. Interest on $90k wont be claimable but we will pay that part off as soon as possible.

Regarding the loan, does it sound right to have a split loan, $230k on IO no offset (the claimable portion) & $90k on IO with offset (new total loan under my name is $320k to pay off the current $320k loan under both names). We (I) would place all rent money, wages & any savings in the offset till this part is paid off?

Dont payments need to be apportioned if its a split? Otherwise shall I try to obtain two completely seperate loans?

Also, Would it be advisable to engage in capitalising interest so that the loan on this property will grow (claimable good debt) & we can pay off our new PPOR mortgage sooner, the bad debt?

Thanks Everyone, Just gathering options before seeing the accountant on Wednesday.

 

[Rolf Latham]

just some numbers coming up in my head

You are buying the 50 % share at face value of 230 k

There is a current loan of 320, meanining that after the sale of half of the place you still own 160 k of the contaminated debt

I recall that just repaying it with another loan wont extinguish the nature of the loan

ta
rolf

 

[Qlds007]

Rolf for once i have to disagree with you.

Bretts strategy is something we use day in day out for a lot of our Accounting refered clients.

He can purchase his wifes share of the property which i assume is the other 50% and borrow 50% of the market value. Once the property is rented out the interest on the 50% share becomes Tax deductible.

Stamp Duty maybe payable depending on which State the security is located. In Qld for example it would be charged at the concessionary rate at half the value as duty has already been paid on the other half.

Brett of course the other consideration is to borrow 100% of the market value and sell the property to a Unit trust.

Again Duty would be payable on the full amount but still might be worth considering.

 

[Brett IP]

Hi Rolf

I am looking at actually going through the whole legal process with a solicitor & paying the stamp duty (50% stamp duty) to assign ownership to just me. Then we would pay out the current $320k loan with a new loan in just my name.

My wife would use the $230k to pay straight off the current $320k, leaving $90k. Once I refinance, I would have the interest on that $230k which was for the change of ownership as claimable (I think), & the other $90k to make up the balance.

Further to this, is a split enough for this type of setup or do repayments on a split need to be apportioned? I.e we wouldnt want to pay a cent more than we had to, on IO, on the $230k portion, however I want to dig in and get rid of the $90k asap. We can then access the equity for another IP or obtain a LOC to capitalise interest.

Correct me if I am missing something.

 

[Brett IP]

He can purchase his wifes share of the property which i assume is the other 50% and borrow 50% of the market value. Once the property is rented out the interest on the 50% share becomes Tax deductible.

Stamp Duty maybe payable depending on which State the security is located. In Qld for example it would be charged at the concessionary rate at half the value as duty has already been paid on the other half.

Brett of course the other consideration is to borrow 100% of the market value and sell the property to a Unit trust.

Again Duty would be payable on the full amount but still might be worth considering.

Hi Richard,

Yes this is what I am looking in to at present as Stamp Duty would be payable on the 50% share. Im perfectly happy with that for what it obtains.

Here's a curly one. If we are to rent the house out immediately, either now before the change of ownership, or as soon as ownership has occured, would I have to pay half the investment stamp duty or half the residential stamp duty? I wonder if any consideration is given to the fact that I have already lived here for 4 years.

There would be a $3587.50 difference as $7175 is added on to QLD stamp duty for an investment property.

 

[Rolf Latham]

Brett of course the other consideration is to borrow 100% of the market value and sell the property to a Unit trust. /QUOTE]

Whatever the accountant says hold of course, and this is where we have had mixed reactions to the repatration of the existing debt. No argument from me on a deal where there is another loan possible if the accountant says go.

In the case of the sale to the unit trust the existing liability that Brett has will be fully extinguished, no issue from any accountant folk.


ta
rolf

 

[Brett IP]

Borrowing the whole 100%, as I see it, will involve full stamp duty wont it? It would also involve LMI. These are big costs.

Also, with a 100% loan the house would be negatively geared. How do you go with distributing losses in a trust? Dont get me wrong, I will look in to the unit trust Idea, however these extra costs come to mind.

 

[Rolf Latham]

The LMI would be depreciable, and the unit trust if properly set up should allow neg gearing if the loan is in your name with a guarantee from the trust.

You then use the funds to buy units in the trust

This also allows you to allocate gearing and future income in a way that may be better than just one personal name

ta
rolf

 

[Qlds007]

Yes Stamp Duty will be involved but could also be involved where you buy your wives share (Just havent had chance to look at the OSR rules in NSW - Certainly would be in Qld).

LMI is only payable where the loan is over 80% (heaven forbid i can't believe I am saying this) if the raised funds are used as deposit on a new PPOR and the loans are cross collateralised then LMI may not be payable.

Even if it is as a Loan cost it is deductible over 5 years or the term of the loan whichever is the shorter period.

Stamp Duty is a Capital cost and merely added to the Cost base when sold.

I am not saying run out and do it all i am saying is work the numbers as you may find it is worth the exercise.

 

[Brett IP]

Hi Richard

Yes 50% stamp duty will be involved by purchasing my wifes share. I am looking into the unit trust side of things as well.

Im grateful for the responses both you and Rolf have given. These are the recommendations I was looking for to make sure I check out all available avenues.

Thanks again

 

[Rolf Latham]

LMI is only payable where the loan is over 80% (heaven forbid i can't believe I am saying this) if the raised funds are used as deposit on a new PPOR and the loans are cross collateralised then LMI may not be payable.

Remove fur ball ..............( referring to visual of the cat in Shrek movie )

As you know, this is one of the few times where xcoll can be of benefit, not only to get to 100 % lend, but some push it as far as 105 % approx including all fees and charges.

Not often we can point to a real borrower benefit for xcoll in posts.

ta
rolf

 

[Brett IP]

In regards to buying the wifes share, would this cause problems down the track if we wanted to access the equity?

So we would be accessing equity on my house for a new IP in both names. To access the money they would always only look at my serviceability as it would all be in my name. Though I guess all the rental income is in my name too.

 

[Qlds007]

Brett dont forget the Title is what dictates the deductibility of the interest and not the name on the loan documents.

You could have a loan in Joint names and the Title in the single name.

Away from that though several other ways around it.

Yes Rolf i cringed when i typed the words C/C (shhhh i didnt mean to say that out load) but one of the only 2 ocassions I would ever recommend it.

 

[Brett IP]

Hi Richard

There is one other important piece of info I left out. The house was originally under my name when I purchased in 2006, however this year in April 2010 we transferred it in to two names, by means of gift to a spouse, avoiding stamp duty. So, at that time, the title changed, but the mortgage didnt.

Does this mean that as at April 2010 I could work out what the mortgage was at that exact point, remove the contaminated ins and outs since then and now (about $70k of them), refinance at a split & claim tax on the home loan portion?

I think not, but just seeing your thoughts, as the loan didnt change at that point & was well contaminated before that point also.

Just after your thoughts.

Thanks for your help

 

[Perth Investor]

Maybe it's just me but isn't it starting to look like tax avoidance now?

Gifting a property to a spouse and then buying it back off them again 6 months later, with a mortgage attached?

Even if that wasn't the initial intention, the tax office would spot that a mile off, and wouldn't view it to well I wouldn't have thought...

 

[Brett IP]

Maybe it's just me but isn't it starting to look like tax avoidance now?

Gifting a property to a spouse and then buying it back off them again 6 months later, with a mortgage attached?

Even if that wasn't the initial intention, the tax office would spot that a mile off, and wouldn't view it to well I wouldn't have thought...

I do see your point, however this same question could be asked to people selling their house to a unit trust & thats perfectly legal. I only gifted my half to my spouse in Apr 10 because the bank required it for a refinance - serviceability.

I think the distinguishing thing here is that I am giving full consideration to the ATO, following the selling & purchasing process (solicitors, stamp duty). Im not just refinancing to one name.

Im also ending up with a smaller loan than what I could have claimed before doing this (in their eyes, it was $320k under both names)

Really, I dont see any difference between buying this half, or buying another property. Still paying stamp duty, still obtaining a mortgage, still following the whole process through.

 

[Perth Investor]

I'm not worried by people who sell their house to a unit trust, or people who sell their property or their share of it to a spouse.

But someone who gifts a house to a spouse and then buys it back off them, with tax deductible dollars?

The ATO data mine the states land registry files, and that would stick out pretty badly I think.

Are you prepared to give the tax office 7 years of your tax history in an audit?

 

[Brett IP]

Absolutely, everyone should be able to do that. Im not hiding anything which is why Im aiming to do everything legitimately.

There was nothing wrong with a gifting, at the time we needed it for finance reasons & it was done properly, just like I dont see anything wrong with an official sale from one to the other.

Independently they are perfectly fine, however I realise it could be a trigger considering one was done after the other. We have our reasonings though & have followed legal processes so it is easily explainable.



To be perfectly honest, im surprised your allowed to even sell half to your spouse & then be able to claim it. I think that would be more concerning to the ATO if a couple owned a $600k house & then one bought half off the other for $300k, resulting in now having a loan.

 

[Brett IP]

One thing Im more intrigued at is the amount (thousands) of people out there who would be claiming interest on their contaminated IP Loans, without knowing any better or without being able to explain.

I would think there would be plenty of mum and dad investors like that. Its certainly true that not all accountants out there know about it either, look at the conflicting stories posted by SS forumites regarding what their accountants have advised. Many conflicting stories.

 

[Perth Investor]

Absolutely, everyone should be able to do that. Im not hiding anything which is why Im aiming to do everything legitimately.

There was nothing wrong with a gifting, at the time we needed it for finance reasons & it was done properly, just like I dont see anything wrong with an official sale from one to the other.

Independently they are perfectly fine, however I realise it could be a trigger considering one was done after the other. We have our reasonings though & have followed legal processes so it is easily explainable.



To be perfectly honest, im surprised your allowed to even sell half to your spouse & then be able to claim it. I think that would be more concerning to the ATO if a couple owned a $600k house & then one bought half off the other for $300k, resulting in now having a loan.

One thing Im more intrigued at is the amount (thousands) of people out there who would be claiming interest on their contaminated IP Loans, without knowing any better or without being able to explain.

I would think there would be plenty of mum and dad investors like that. Its certainly true that not all accountants out there know about it either, look at the conflicting stories posted by SS forumites regarding what their accountants have advised. Many conflicting stories.

I agree with everything you say. I'm just not as confident as you on my filing system to cope with an audit that goes back so far, but having owned a business, had a partnership, did a development in a trust (google: margin scheme, eew) I have absolutely no interest in getting the attention of the ATO. Not that I did anything wrong, I just don't have the time or energy to cope with an audit.

And I think the above example would be a red rag to a bull for the ATO.