Lease Option complication

[Robert]

From: Robert Forward


This one is for the accountants out there, and anyone else wanting to put a comment or two in as well.

I do intend on talking with my accountant in the next few days but but have been busy, anyway I thought I'd put this to everyone in here to.

SCENARIO:

SETUP:
Grandpa owns house, he receives minimal rent for it to retain receiving the pension. However the tenants (relations) pay part of grandpa's retirement village rent too. The minimal rent goes to the Grandpa's son to spend anyway. The tenants are moving out soon as they've built their own "dream" home and the property will be vacant.

In I come:
We are offering to buy the property off Grandpa on a Lease Option. Now I've only learnt of the above today (other then the cheap rent). The dilemma that we need to get around is, if I pay minimal rent to Grandpa and an "Option" fee. Is this option fee classed as "Rent" or is it classed as returning of "Capital" from the property. Grandpa has owned this property for 30 odd years and no I think CGT does not apply, he won't have to pay it as he has owned it for so long.

Question: How can we structure it so that Grandpa retains his pension and we can retain the property on a "Lease Option" style purchase. Can it be said that we are living there paying "$x's" in rent whilst building up the deposit to purchase the property, it's just we are handing the $$$'s, deposit over to Grandpa weekly and allowing him to spend it.

And yes, I will be placing caveats over the property if we go ahead with it for personal protection. And having fully documented details of all transactions.

Cheers
Robert

The Sydney "Freestylers" Group Leader.

 

[DaleGG]

Reply: 1
From: Dale Gatherum-Goss


Hi Robert!

Actually, by granting an option, Grandpa is deemed to have created an asset and disposed of it at the same time. Therefore, he will pay CGT on the option. Sorry.

To help properly, we'd need to know exactly what are Grandpa's other income and assets. The age pension has 2 separate tests that must be passed before it is paid.

The first is an asset test - Grandpa would need to have assets (Centrelink think cars and furniture are assets too bye the way) less than $141,000 if he is a homeowner and less than $242,000 if he no longer owns his own home. These amounts are to receive the full pension. If the assets are higher, he might receive a part pension depending upon the exact amount of assets.

The second is an income test whereby grandpa is not allowed to earn more than $112 per fortnight before his pension starts to reduce.

Rob, I'd suggest talking to the family to see if there is a way that they'll work with you around these two tests. I think that there might be something possible. . . Good luck!!

Dale

 

[Robert]

Reply: 1.1
From: Robert Forward


Hi Dale

Thanks for your time in answering.

>Actually, by granting an
>option, Grandpa is deemed to
>have created an asset and
>disposed of it at the same
>time. Therefore, he will pay
>CGT on the option. Sorry.

Would CGT still be payable if it was his PPR before moving into the retirement home a few years back. And he has owned the house since 1964?

>To help properly, we'd need to
>know exactly what are
>Grandpa's other income and
>assets. The age pension has 2
>separate tests that must be
>passed before it is paid.

Grandpa only receives the pension and $110per fortnight in "rent" from the property. This way he keeps his pension, seemly.

>The first is an asset test -
>Grandpa would need to have
>assets (Centrelink think cars
>and furniture are assets too
>bye the way) less than
>$141,000 if he is a homeowner
>and less than $242,000 if he
>no longer owns his own home.
>These amounts are to receive
>the full pension. If the
>assets are higher, he might
>receive a part pension
>depending upon the exact
>amount of assets.

The house's land value is at $398k, so he shouldn't really be getting the pension, or the full pension anyway.

>The second is an income test
>whereby grandpa is not allowed
>to earn more than $112 per
>fortnight before his pension
>starts to reduce.

This is the amount that is currently being paid in rent.

>Rob, I'd suggest talking to
>the family to see if there is
>a way that they'll work with
>you around these two tests. I
>think that there might be
>something possible. . . Good
>luck!!

Thanks Dale. I think their is was around it, we just need to find out how.
If we were to say that we are buying on a delayed settlement and are saving for the deposit (not an "option") will Grandpa still be liable for CGT.

Cheers
Robert

The Sydney "Freestylers" Group Leader.

 

[DaleGG]

Reply: 1.1.1
From: Dale Gatherum-Goss


Hi Rob!

CGT is payable on the value of the option and has nothing to do with the house. Therefore, the PPOR exemption does not come into play. Sorry.

Delayed settlement should not cause CGT but, it may still be treated as an asset for Centrelink's purposes. But, that is his problem and not yours really.

Good luck

Dale

 

[Boyler_Room]

Reply: 1.1.1.1
From: Boyler Room


My 2 cents?

What are you paying as an option fee?? Keep it minimal and surely this will solve your problem. You can use $1 as an option fee. I guess the point I'm making here is you need to remember if you're working the deal, then you're making the rules. Structure the deal so that it works in your favour while still helping the family/grandpa out.

Another question i have is how much of the rent is coming off the price, if any at all? Obviously you're going to have to keep it to $55/wk rent, so how much of this is coming off the price?? If they're not happy that something is coming off the price, raise the purchase price and see if you can't work it to your advantage that way.

Oh, the other thing is how long does the option stand?? This can affect how you might approach the situation.

This is my example run down:

Say, you get the contract on the property for $398k (just using the figure u quoted earlier) and to keep the costs down over the duration, you only give them $1 as an option fee. You want $25/wk to go toward the purchase price, but they're not happy that effectively they're only receiving $30/wk. So to help out, you raise the price to $405k over the duration of the option.

Depending on the duration, this can work for you or against you, but of course these are just example numbers, and you need to set it up to suit the situation.

Just my 2 cents....
anything else I think of later, I'll be sure to jot it down for u. ;-)

Boyler Room
Co-Ordinator for ADL Freestylers

 

[paulzag]

Reply: 1.1.1.1.1
From: Paul Zagoridis


Hi Robert

I know we discussed this deal, but I think it was over some cosmopolitans and my memory is fuzzy *8-}

An installment contract may be more attractive in these circumstances.

I agree with Boyler Room, keep the option fee low. Say a couple of grand so CGT is not significant (make it payable 367 days in arrears so he gets the 50% discount)

Pay a maintenance allowance or some such. Basiccally try to classify the payment as something else. But I'm too tired at the moment to think of what else.

Sorry not much help tonight.

Paul Zag
Dreamspinner
WealthEsteem coming soon at...
http://wealthesteem.dyndns.org/

 

[Robert]

Reply: 1.1.1.1.1.1
From: Robert Forward


Thanks for the reply Paul

Here is what I'd like to be doing.

Taking out the Lease Option, with minimal "rent" payments. But I'm wanting to put up to $400pw into the option, with a 3 year lease agreement in place. This way I can place a Caveat over the property due to having such a long lease, as well as a caveat for the deposit.

Who much do pensioners get a fortnight anyway. Cause if I was willing to pay $500pw and $400 of that is the option would Grandpa still be better off? Would he loose other pensioner entitlements such as medicare etc? I don't know, cause I'm not old and I don't intend on living on a pension.

Any further help is appreciated.

Cheers
Robert

The Sydney "Freestylers" Group Leader.

 

[WebBoard]

Reply: 1.1.1.1.1.1.1
From: Sergey Golovin


Robert,

Are you related to that Gentleman?

After all he is still entitled to Senior Card, which in turn allows cheaper medication, transportation, movie tickets and groceries (?).

Serge.

 

[Robert]

Reply: 1.1.1.1.1.1.1.1
From: Robert Forward


No Sergey, I'm not related.

Unfortunately.

Cheers
Robert

The Sydney "Freestylers" Group Leader.