Negative Gearing Problem Using Trusts

[plgwa]

I cant find an answer to my problem anyware so I'm hoping the collective knowledge here might help.

I'm sure I'm not the only one out there in this position so lets see how we go.

I would love to hear from one of the TAX EXPERTS who frequently post here.

I have a substantial portfolio in WA but have now hit a wall.

I have just bumped over $2M in borrowing through banks.

To go any further I need to take on a NoDoc loan and use a property I hold the title on to secure further lending. OK sounds simple!!!

In doing this I can add another 3 or 4 properties to my portfolio this year.

My problem is that all lenders who offer NoDoc loans insist on having the borrowing in the name of the property owner. (ie the Trust)

If the borrowing is in the name of the trust, I can’t claim the interest and bank fees on the loan in my personal tax return even though I have paid the money.

This is a big problem for me.

How do I get around this ??? Anyone else using NoDocs???

Regards

Paul
Ardross, WA

 

[Rixter]

Paul, have you considered the use of a Cashbond/Annuity to increase your servicability in your own name?

 

[D.T.]

Hey Paul,

Firstly you should be congratulated for reaching the 2M borrowings milestone, as not many make it that far. Well done.

If the borrowing is in the name of the trust, I can’t claim the interest and bank fees on the loan in my personal tax return even though I have paid the money.

Instead of using your discretionary / family trust, have your accountant / taxlawyer draw up a hybrid discretionary trust (HDT). Do a search for these on this forum for the full info, but basically they allow for the negative gearing benefits to be passed back onto you as an individual.

Cheers and good luck!

 

[plgwa]

The idea of buying an Annuity fund is a good one but I dont think it would generate sufficient income to do what I want to do. The problem I see with this is that I would be using money from a LOC at say 7% and only get 5% back. Plus there are setup costs.

What I'm trying to do is this:

Using a house I hold the title to (worth say $580K) I will borrow 80%

80% of $580K = $460K

Put $200K into a sinking fund

This leaves $380K in a LOC

Assuming I buy 3 properties worth $500K each (as an example) I need $300K of this (20% of $500K). The rest will be funded by the lender and the new properties provided as security.

Therefor my total additional borrowing is about $2M

Isn't gearing great?

I could do all this in my own name but I would prefer to have the properties owned by individual trusts for obvious reasons.

 

[plgwa]

Hi Dave

Unfortunately this is not the case. Losses in a unit trust cannot be passed on to unit holders or beneficiaries. Instead they are carried forward and offset against future income. If you borrow money in your name and buy units in your trust then the interest and bank fees on the loan (which is in your name) is claimable against your personal tax return.

The ATO are very clear on this!

In my case the borrowing needs to be done by the trust itself as the lender will only lend money to the owner of the property (the trust) due to the increased risk associated with NoDoc loans.

Hope that was clear.

 

[Rolf Latham]

Hiya PLG

Id suggest you dont make assumptions just yet on what borrwoings you can make on a full doc basis.

While on the surfae things look tight, the reality MAY be that if you fish around you cans till get 80 % lends without an issue. Much depends on whom you talk to.

ta

rolf

 

[plgwa]

Hi Rolf

I hear what you're saying but I'm pretty sure I've reached my limit. I'm fairly in tune with where I am financially and I've pushed my lenders to the limit.

Cheers

 

[Ross]

Maybe a good broker like Rolf is what needed ......as he said ......it depends who you talk to.
I didnt have to go down the loc doc path but the package Im using with St George allows borrowings in my name and properties in the HDTs name. Once I hit serviceability issues I will use my wifes earnings as well

 

[plgwa]

Hi Ross

I'm not a beginner.

I know who is offering what and have over $2M borrowed. I recently moved from NAB to St George to pick up an extra $400K. Most banks are quite conservative when calculating DSR and will only bend so far. I know because I pushed them to the limit.

I have used my income, my wifes income, my property income and all the tax benifits I've got.

The only thing left for me is to either find more income or go down the nodoc path which gets me back to my original problem:

I have to borrow in the name of the UT which means I cant claim the interest in my tax return.

SOMEONE MUST HAVE AN ANSWER. I CANT BE THE ONLY ONE IN THIS POSITION!!!!!!!

 

[The Y-man]

We hit a similar problem in 2003/2004. Our way around it was to increase our income through other markets (similar to Rix's proposition - though we did through shares and options trading, as well as income type managed funds).

How much more debt do you believe (as opposed to banks belief) you will be able to handle comfortably service?

Cheers,

The Y-man

 

[plgwa]

I'm looking for another $1.5M to spend on property plus another $300K in reserve so $1.5M to $2M.

That will keep me busy for 12 months and then i'll need to look for more.

Its really just a matter of balancing equity and debt and understanding the real cost of owning a property over a period of time.

I'm not comfortable with shares and options. Cashbonds might be OK although i'd have to invest alot of money to get the additional income needed to service that level of debt.

You're chasing your tail a bit. ie Increasing debt to increase income to take on more debt.

 

[Rolf Latham]

Hiya Paul

On a typical back to back scenario, if you currently have $ x with STG, a spread of the portfolio, will get you some where in the region of 1.4 to 1.5 $ x, and still on full doc.

Its not about being a beginner, or even being a very experienced investor, or even knowing YOUR finances. Its trying to macth the portfolio you have to a range of lenders so that you maximise the resources available to you, those being your equity and your serviceability.

I call that structured financiing, begin with the end in mind, and it simply cant be done with one lender, for a range of reasons. A structured plan wont leave you up the creek without a paddle, since you will know where to go.

I doubt you do your own taxes, and while finance is a simpler, and much less gray area, maybe Paul, give in just a little, and sit with someone that walks the track every day, and have a look from the other side of the curtain. I guarantee you will see things that you currently cant, because you are too close to your challenge.

You have a profession, something you make your lviing from, youd be very very good at that. We cant excel at eveything, for if we attempt it, we are generalists and and not brilliant at anything.

ta
rolf

 

[Rolf Latham]

And

I forgot

There are quite a few lo doc lenders that will do 3rd party related lending(HDT type structure) IF you need to go in that direction.

ta
rolf

 

[plgwa]

Thanks Rolf

My previous comments were probably taken the wrong way. I'm usually the first to admit I dont know everything.

I have used a broker and accountant to review my goals and setup my existing structure.

It has been a lot of hard work and has cost quite a bit to get everything setup the way it is.

I hear what you're saying though and I'm not sure what to do.

What are you suggesting?

 

[Rolf Latham]

Hiya

Point taken.

What to do...............try another broker perhaps ?

If your current structure has been put together by a broker, it may be reasonable to say, that this structure isnt going to serve you. Indeed, Id be so cheeky to say that the broker wasnt thinking of your (or theirs)future needs.

You may be right, you may be beyond help. Try one of the brokers that posts here, effectively you have little to lose I think, and maybe lots to gain.

ta
rolf

 

[tubs]

Paul

I know this is a little off-topic, but are you sure you are going the right way? It seems that you're borrowing in YOUR name, then either gifting or lending the money to the trust to buy the property.

I assume that you're not gifting the money to the trust, or you wouldnt be able to get a tax deduction. But if you're lending the money to the trust and you're doing it for asset protection then you're probably defeating that purpose.

If somebody ever came after you, then the trust owes you a whole lot of money, and they could easily force the trust to pay it to you (ie sell the assets and pay the loan to you.) Any equity would proably be exposed.

Tubs

 

[plgwa]

Tubs

The idea is to borrow money and buy units in the trust. Its no different to buying shares in a company. By using this structure you own nothing and control everything.

The trustee is a company and I am the director. One day I will pass all this on to my kids any they will become directors.

Paul

 

[CATA]

Hi Plgwea

In saying that you own nothing with a unit or hybrid trust is not quite correct. What tubs is saying is that you will own units at a dollar value. These units are an asset which can be sued for.

Hope this helps

Cata

 

[tubs]

Actually Cata, it sounded like a discretionary trust to me, not a unit trust!

Sorry for the confusion.