renting ppor from trust

[alpina]

hi guys,

as this question has come up a few times, i'm wondering if anyone has tried spreadsheeting the real advantages/disadvantages. for eg, i understand that he whole loan repayment becomes tax deductible but on the other hand their is the issue of increased income (rent), trust maintainance (understand that there are likely to be more properties under the trust) land tax, cgt etc.

anyone done the numbers and will to share?

regards,

julie

 

[Aceyducey]

Julie,

How long is a piece of string?

Personal circumstances dictate.

This approach is not entirely based on financial measures, which vary individually anyway, but also influenced by personal lifestyle choices.

Cheers,

Aceyducey

 

[alpina]

thanks ace but looking at it purely from a financial aspect initially.

based on my rough numbers when you factor in land tax and ,cgt the difference is not as large as i would have thought, allowing for top bracket deductions. cant help thinking im missing something here

julie

 

[Glebe]

Julie,

Why don't you attach your spreadsheet for us to munch over?

Glebe.

PS - CGT? Why sell??

 

[alpina]

here is my work in progress spreadsheet. wouldn't mind a hand with the tax benefit. probably need to allow for the $500pw rent somewhere too

cheers,

julie

 

[juggernaut]

Hi Alpina. Here is my 2 cents worth.

- Buying your PPOR via a HDT will be notably cheaper because of the negative gearing aspects, i.e. being able to claim building depreciation, interest on the loan, depreciation on ALL of your fixtures and furnishings, loan borrowing cost (over five years) and purchase costs. It will even enable you to purchase a property considerably more expensive that what you could otherwise afford. This is simply due to the negative gearing benefits listed above. The bigger your marginal tax bracket the better of course. For the record, I am not saying that one should buy a more expensive place just because they can.

- Although my next point is not directly concerned with the financial advantages of owning a PPOR via a HDT compared to buying it yourself, it is worth mentioning. Due to the cost savings achievable via negative gearing, the extra money that you now have available may be utilised to put towards other IP's therefore adding further to your mid to long term net wealth.

- I am not 100% sure on this next point. I do not have my HDT info in front of me at the moment, so you may want to check this out for yourself. You may lose out on CGT if you ever decided to sell the HDT owned PPOR but not necessarily at the rate at which your calculations demonstrate. In a HDT, the profits would be distributed to those on a lower marginal tax bracket than say yourself. For example, instead of paying 47% tax on 50% of the profit, you could potentially distribute the profit to a beneficiary in the 30% tax bracket. That is a gross savings of 17%.

Hope this helps.

 

[Glebe]

Hi there,

I've played with the spreadsheet, but I'm a newbie to property investing so I have no doubt I've got lots of it wrong, so I don't really know the value of this. But anyway...

 

[alpina]

thanks your spreadsheet attempt glebe

i forgot about vendor tax. your sheet still needs to take in account land tax.

noted also that you are working off a 40% tax rate instead of 47% too

anyone else got any comments? have we missed anything?

cheers,

julie

 

[twodogs]

How about

- annual accounting and trust expenses
- sale and purchase costs

 

[alpina]

good point maniyak

arent purchase costs already covered? eg, stamp duty. or are you referreing to loan est costs etc?

in regards to sale cost, i guess you need to factor in agents commission will be the same in both scenarios

will try and update file and resend.

thanks

julie

 

[twodogs]

Yes, puchasing legal and lending costs, lending costs are depreciable too.

Sales costs are agent fees and some legal costs too, but these are same for PPOR or trust.

Wouldn't the CGT 50% discount apply as the gain would be passed to the beneficiaries for HDT?

Great spreadsheet, thanks

BTW, how do you go with finance for this trust?

 

[alpina]

UPDATED.

interesting that owning your own ppor shows a loss if sold after 5yrs and thats w/o taking into account selling costs.

have i done this right?

regards,

julie

 

[Glebe]

UPDATED.

interesting that owning your own ppor shows a loss if sold after 5yrs and thats w/o taking into account selling costs.

have i done this right?

regards,

julie

Well yeah the interest expense is $56000 a year, and the capital gain is $60000 a year (before tax). It's a 6% p.a. capital growth.

 

[twodogs]

I'm not sure, but there may be a problem here.

You have $30,000 rent income that reduces the Trust's loss, but that's your $30k. So isn't your total personal annual cost the after tax trust loss ($17,400) and the rent you paid ($30,000) or $57,4000. Only a $1,600 saving after all the extra taxes and costs....

Or maybe I'm missing something, again

 

[Glebe]

you're right.


but surely if you're selling with a cap gain of 300 000 you can find someone on less marginal rate than 48.5% to allocate the tax to.

 

[alpina]

more good pts

thanks

julie

 

[Kenny]

thanks ace but looking at it purely from a financial aspect initially.

based on my rough numbers when you factor in land tax and ,cgt the difference is not as large as i would have thought, allowing for top bracket deductions. cant help thinking im missing something here

julie

Thank you Alpina for bringing this topic up. I have only just started trawling through the old threads on this exact subject and was rapidly getting that sinking confused feeling.

My initial rambling thoughts are that one needs to somehow:

1. Account for the value of asset protection in placing your PPOR within a trust structure.

This would necessarily differ depending one's circumstances (or as Acey puts it; your piece of string.). Does the owner/s have a high risk profile for litigation or are they vulnerable in other ways that would put their assets at risk ? The problem here lies in predicting how this situation will change over the years (you cannot. eg. marriage, children, business startups, public liability) and whether one's SANF allows for individual ownership of assets.

Perhaps one could estimate the equivalent cost to reasonably insure against such occurences and factor this in?

2. Account for the value of having the option to have the PPOR become an IP already within a trust structure without incurring transfer costs and triggering CGT.

Again a factor dependent upon one's personal circumstances but the PPOR you are considering today may not be the case forever. With the trend towards downsizing with empty-nesters and relocation for lifestyle purposes, it is quite probable that one outgrows the PPOR. In this scenario, if you wish to retain the property as an IP in a trust, rather than just selling it, having the PPOR already there does save money and time.

Selling the PPOR as an individual owner does have the benefit of CGT exemption as has already been highlighted.

I'll try to finish these thoughts later...work beckons, <sigh>

Regards,

Kenny

 

[Aceyducey]

On average people change properties every 7 years, so it's a reasonable assumption that you won't live in your PPOR for ever....

So it's worth setting it up as an IP.

Not to mention the advantages of having the Trust furnish the place (with depreciation applying naturally), handle maintenance, etc.

None of which is really captured in your spreadsheet Alpina.

Cheers,

Aceyducey

 

[alpina]

really enjoying this thread guys - learning a lot along the way

preliminary conclusions on my end are that both structures would probably give similar net result (perhaps trust setup slightly in front where large borrowings are involved) although trust setup in my example is going to give significant cash flow advantage over 5 year term which can in turn be injected into reducing loan or directed towards other investments.

keeps the comments coming

julie

 

[ToeEdge]

Great thread!

Just wonder how the Bank/Lending institution guidlines handle lending to a trust. May need more than 20% deposit.

Rent paid by Trustees goes into Trust account to cover costs... correct? So the income is umm... an expense......