Is this a good idea?

[Clean]

Hello everyone

I'm new to this forum and I'm in the processing of learning about investing in property. I haven't contributed much at this stage but i intend to in the near future when I have learnt a bit more about IP.

I would like some suggestions or advice in relation to purchasing a family home.

At the beginning of this year, I bought my first IP off-the-plan in Innaloo, Perth which is due for completion early next year I purchased it for $500,000 and have taken out an interest-only loan.

My parent's have plans to go on a long vacation later this year and have offerred to sell me their property for about $150,000. This is the amount they have still owing on the property. The property is worth about $500,000 on the market.

The only draw back is they will be returning to live at this property when they get back from their vacation and I won't be receiving any rent from them.

what do you guys think? I thought that it might be a good idea, as it will increase my borrowing equity for my next property?

I was thinking of utilising the FHOG to purchase the property and after six months change it over to an investment property. Will I be able to do this and claim the interest back on tax?

How should we go about with the transaction to minimise tax for both my parents and myself?

Any information or advice would be much appreciated.

Thanking you guys in advance

 

[BayView]

As long as you can service the $150k purchase price (assuming you are buying it with a loan?) then it's a great idea.

You get an instant $350k equity in the property.

Of course, you would only be able to use 80% of the property's value - $400k, less any loans, and subject to servicability as well.

You can't claim any interest back on tax if there is no income from the property, usually.

 

[Clean]

Thank you for your input

 

[Token Funder]

Thank you for your input

I assume you have given a commitment to your partents they can live in the property rent free for as long as they like.

They should obtain legal advice to protect their interests (i.e. lifetime tenancy) in the event unexpected occurs are you are unable to hold the property, particularly if you are planning to access the equity.

Be a good child.

 

[Rob G.]

They should obtain legal advice to protect their interests (i.e. lifetime tenancy) in the event unexpected occurs are you are unable to hold the property, particularly if you are planning to access the equity.

Be a good child.

Hmmm ...

CGT on granting legal or equitable interest ?

Land tax ?

Lender's fear of other legal or equitable impediments to their power of sale ?

Cheers,

Rob

 

[twobobsworth]

offerred to sell me their property for about $150,000. This is the amount they have still owing on the property. The property is worth about $500,000 on the market.

And you're fine with this?

 

[WinstonWolfe]

I'd tell your parents to go run it by an accountant.
It is not a good idea and they need to hear it from someone apart from you.

Basically, it boils down to you payng for a $25k holiday for them every year.
(that's interest, rates, maintenance, depreciation in pre tax dollars with no deductions.)

That's 25k that you can't use to service debt.

And like the others say, there's tax considerations for gifted assets.

There's also what if's like if you :
die
lose your job
divorce and lose half your assets
one parent needs the expense of a nursing home and the other wants to stay in the house.
etc
etc

 

[marg4000]

I assume you are an only child therefore no sibling issues?

Points to consider:
If you buy your parents house it becomes yours (obviously) and therefore part of your assets in the event of present or future marriage, possible divorce or (heaven forbid) your untimely departure from our happy earth. Where does this leave your parents? Can their interests be fully protected in the event of conflicting interests of a spouse and/or children, present or future?

You will have to pay stamp duty on the full value of the house, not the price you pay for it.

While your parents live rent-free as per the agreement, who is responsible for rates, repairs, maintenance etc? What if modifications are needed for health reasons?

The lack of a major asset to sell may limit their possible entry to higher levels of care in the future. As we have found with my mother, the more money available the wider and better (and quicker) the choices.

Are your parents on, or do they intend to claim, a pension? Deprived assets as would apply in this case will affect their situation for at least 5 years.

I would suggest paying for good legal advice to protect your parents' interests. It's usually the unforeseen events that trip us up.

But overall the only winner here is you, which should be of concern.
Marg

 

[Perp]

As has been alluded to by others, I can't imagine why your parents would make, and you'd accept, such an offer from your parents. If you're one of several siblings, I think it's bound to cause bad feelings.

If you're an only child, well, it alleviates that challenge, but there are still all the considerations mentioned about whether your parents may compromise their pension entitlements, and if they may need the funds at a later stage to move into a nursing home.

This is definitely a complex issue with implications that you may not have considered. You should each pay for your own legal and financial advice before proceeding, and ensure that appropriate documents are drawn up to protect all parties' interest.

 

[Token Funder]

Hmmm ...

CGT on granting legal or equitable interest ?

Land tax ?

Lender's fear of other legal or equitable impediments to their power of sale ?

Cheers,

Rob

The potential price of leaving home physically, but not financially.

 

[Rob G.]

The potential price of leaving home physically, but not financially.

Yes ... I could understand wanting to pass the asset inter vivos more than 5 years before (expected) death if a contested will is anticipated - past marriages, etc.

I know that stamp duty is nominal for love and affection.

BUT it sounds simpler if the parents wish to gift whilst avoiding CGT, Centrelink assets test, land tax and maintaining a main residence exemption if they were just to borrow secured against their home and gift to the child.

Or even the child could lend the parents $150k secured by a mortgage over the parents' property.

Even without trying to make a "commercial loan" for interest deductibility, it could work out better since the child could add certain rights into the loan contract in respect of the parents (remember CGT event D1 does not arise from borrowing money).

I hate estate planning, but so does everybody who really should be concerned with it.

It really is worth getting detailed legal advice regarding your position and objectives.

Cheers,

Rob

 

[Clean]

Thank you for all your thoughts. I really appreciate it