Non-bank loan and taxation

[YD001]

Hello,

We are looking to purchase an investment property however, we are planning to get a lone from our family rather than financial institutions. We have made an agreement with our family that they will be receiving approx. 6% interest on the loan.

My question is are we going to lose any tax benefits in terms of negative gearing and tax deductions on loan interest by obtaining finance from our family in stead of the banks?

Cheers,

 

[Aaron_C]

No. It makes no difference whatsoever. The only thing is that you need a credit licence to lend money in many instances.

 

[Terry_w]

Same principles apply.

Just make sure the loan is properly documented with a written loan agreement with full terms.

It would be a good idea for the lender to secure the loan somehow so they will take priority if something happens.

Consider death.
What would happen if the lender died? If there is no documentation then you might be able to argue it was a gift and their estate could miss out. If there are no terms then the estate may argue that it is a debt due and payable immediately - which could cause you problems if it is not possible to refinance.

If you die you need a will to instruct how this loan will be paid out. If it is not considered in the will the loan will be paid out of the property that is securing it.

Consider bankruptcy
What if the lender goes bankrupt. Your loan will be payable still but paid to their trustee in bankruptcy who may be able to call in the loan.

What if you go bankrupt? You would want your lender to be able to get their money back in priority to other creditors

Tax,
Consider the interest rates. Market rates should mean full deductibility for you but this will be income for the lender. So the lender should consider who will be the lender - lower income spouse maybe, or a discretionary trust maybe. How do they get the money into the trust etc

Centrelink
Consider what effect this will have on getting access to pensions years down the track - both you and the lender.

Divorce.
You or them. You want to make sure it is not possible for one party to argue it was a gift when it wasn't and be divided up as assets of the marriage.

 

[dryath]

How exactly does one go about setting a loan such as this up terry? just go see a lawyer and draw up something that sorts out all these scenarios? and hey presto?

Certainly alot more things there to consider than I ever would have thought of though, thanks for that =)

 

[tvadera]

wow Terry, like the way you think, so many scenarios, combinations. Gosh I never cared more than the interest rate and installment.

Same principles apply.

Just make sure the loan is properly documented with a written loan agreement with full terms.

It would be a good idea for the lender to secure the loan somehow so they will take priority if something happens.

Consider death.
What would happen if the lender died? If there is no documentation then you might be able to argue it was a gift and their estate could miss out. If there are no terms then the estate may argue that it is a debt due and payable immediately - which could cause you problems if it is not possible to refinance.

If you die you need a will to instruct how this loan will be paid out. If it is not considered in the will the loan will be paid out of the property that is securing it.

Consider bankruptcy
What if the lender goes bankrupt. Your loan will be payable still but paid to their trustee in bankruptcy who may be able to call in the loan.

What if you go bankrupt? You would want your lender to be able to get their money back in priority to other creditors

Tax,
Consider the interest rates. Market rates should mean full deductibility for you but this will be income for the lender. So the lender should consider who will be the lender - lower income spouse maybe, or a discretionary trust maybe. How do they get the money into the trust etc

Centrelink
Consider what effect this will have on getting access to pensions years down the track - both you and the lender.

Divorce.
You or them. You want to make sure it is not possible for one party to argue it was a gift when it wasn't and be divided up as assets of the marriage.

 

[Terry_w]

How exactly does one go about setting a loan such as this up terry? just go see a lawyer and draw up something that sorts out all these scenarios? and hey presto?

Certainly alot more things there to consider than I ever would have thought of though, thanks for that =)

Well, like dentistry, you could do it yourself or get a loan agreement drawn up by a lawyer. There are also some on line providers out there.

 

[coastymike]

And some of the problems found with online providers.