Is this fraud?

[Samwise]

Something to ponder:

Couple A pick out a property they like, say $1m... Couple B buys it and rents it to Couple A.

At the same time Couple B pick out a property they like of similar value ... Couple A buys it and rents it back to them.

An agreement is signed such that say, in 5 years there will be a forced sale/buyback or whatever (or extension of the agreement) so that the ownership of the properties swaps at an agreed point in time.

Both couples are then living in the property that they want to live in but the costs (mortgage) are tax-deductable.

Disregarding the risks/ details of how the parties honour the agreement (or otherwise), and the details of how financial imbalance between the values of the two properties and loans is managed, is this legal? I cant see anything necessarily wrong occuring but it seems a bit obvious to me...?

Anyone doing this?

Sam

 

[Propertunity]

Sam, with the exception in your example of the forced 5 yr buy back, this scheme has been around since IPs were tax deductible. I remember it being promoted by FAs 30+ yrs ago.

No, it is not illegal. Yes people do it.

 

[alexlee]

Disregarding the risks/ details of how the parties honour the agreement (or otherwise), and the details of how financial imbalance between the values of the two properties and loans is managed, is this legal? I cant see anything necessarily wrong occuring but it seems a bit obvious to me...?

Both parties would have to pay CGT and stamp duty when the properties change hands in 5 years, though.

 

[dan c]

Both parties would have to pay CGT and stamp duty when the properties change hands in 5 years, though.

And even if the agreement states a price for the forced sale in 5 years time, CGT would be calculated on the market value.

 

[alexlee]

There would also be other potential issues. Say, one property appreciates more than the other. One property has problems, one side has more wear and tear..... lots of issues.

There are other strategies that can be used instead.

 

[The Y-man]

Both couples are then living in the property that they want to live in but the costs (mortgage) are tax-deductable.

Just keep in mind that there has to be rent paid by each party (at market rates) - so any costs such as interest, rates etc are offset by a rental income. So your claimable expense may be quite low - and then take into account you would say get 1/3 of that back in your tax. You have to balance this out with the benefits of having the CGT free status as your PPOR.

The Y-man

 

[Samwise]

There are other strategies that can be used instead.

Such as?

Interesting anyway. My wife is a lawyer and thinks its tax evasion pure and simple!

 

[alexlee]

Such as?

Interesting anyway. My wife is a lawyer and thinks its tax evasion pure and simple!

Why is it tax evasion? By doing it you're up for another lot of stamp duty when you swap the properties again, and you have to pay CGT. In return you get to deduct expenses, but also have to declare rental income.

One strategy would be to build up a portfolio of IPs first, then buy the PPOR and debt recycle.

 

[Dazz]

My wife is a lawyer

.....I realise it's hard sometimes, but try and be nice to her despite that.....

 

[Samwise]

Yes its hard... and shes not an accountant, bless her!

 

[Simon]

Why is it tax evasion? By doing it you're up for another lot of stamp duty when you swap the properties again, and you have to pay CGT. In return you get to deduct expenses, but also have to declare rental income.

One strategy would be to build up a portfolio of IPs first, then buy the PPOR and debt recycle.

Alex - I think if the ATO can show that the purpose of the scheme was just to reduce tax then they can disallow it.

 

[Samwise]

How? Its not tax evasion its tax reduction... surely?

We all do things just to reduce tax

 

[csc2]

What happens if there is a fallout between the two parties..jealousy, argument etc?? The best family/friend deals can look like $hit if someone gets their nose out of joint with payments or something more trivial.

I wouldnt sleep at night being part of this type of dodgy scheme............

i have not heard of it, nor would I take part in it.

Sooner keep a clean nose and not have in the back of my mind it "maybe dubious or at worst illegal" and you could be in a for a real shock down the track with a knock on the door by the tax man...$$$$$$$$$$$$$$$$$$$$$$$$ payback plus fine plus plus!

"KISS" principle always works for me!

 

[RumpledElf]

And even if the agreement states a price for the forced sale in 5 years time, CGT would be calculated on the market value.

Eh? Shouldn't it be on the sale value? You're being taxed on the *actual* profit, not *potential* profit.

I have a house for sale for less than everything indicates it is 'worth', there's no way in hell I'm paying CGT for that. I just want *some* money out of the deal, if I hold out for what people say it is 'worth' I'll never sell it.

 

[wobbycarly]

Eh? Shouldn't it be on the sale value? You're being taxed on the *actual* profit, not *potential* profit.

I have a house for sale for less than everything indicates it is 'worth', there's no way in hell I'm paying CGT for that. I just want *some* money out of the deal, if I hold out for what people say it is 'worth' I'll never sell it.

Good pickup, but I reckon he meant that stamp duty would be calculated on market.

 

[jaycee]

(?)

Couple A buy their dream house and couple B move into it.
Couple B buy their dream house and couple A move into it.

Declare all income
Claim all expenses

One day,

couple A moves into the house they own.
couple B moves into the house they own.

 

[Dazz]

Reminds me of that fabulous Britsih comedy series called "Bread".

The arrangement described is exactly what the family were doing with their grandparents I believe.

 

[jaycee]

Not suggesting that's where such a strategy belongs, a comedy show ?

 

[Neophyte]

Also remember that all repairs etc... have to get paid for by the other couple.

It takes a fair degree of trust to be prepared for that level of financial entanglement.

 

[tobe]

The first time I came across this idea was in Jan somers book, 'how to pay off your home in 5 years or less'. She just put it forward as an idea, not something she advocated or did herself.