Restructuring IP/PPoR loans and transferring title - CGT?

Hi all,

Given it's EOFY, I'm currently mulling over my loan structure and looking to clean it up in order to increase deductible costs on the IP.

I think I'm clear on most of what I want to achieve, but I have a couple of questions for the brains trust.

Scenario:
  • The wife and I have a PPOR and an IP
  • The IP was originally our PPOR, converted to IP in Jan 2013 when we purchased the new PPOR in Nov 2012
  • Both titles are in both our names
  • IP: value ~$600k, owe $250k
  • PPOR: value $850k, owe $780k
  • I am the main breadwinner
Unfortunately when we purchased the current PPOR, we didn't give due consideration to proper loan structure due to other priorities at the time (a baby arrived the week of settlement and moving house)

I am now looking at restructuring the loans in order to maximize the deductible interest payments on the IP by transferring the title of the IP into my name only (in Vic, so no stamp duty due to "love and affection") and then refinancing with our lender to shift as much of the debt onto the IP loan as possible.

Questions:
  • Am I on the right track with the above?
  • Will we need to pay CGT on the IP (due to it being transferred from both names to mine)? If so, can I do anything to minimize the impact of CGT owing?
  • Is there anything else I need to consider?

Many thanks!
 
Questions:
  • Am I on the right track with the above?
  • Will we need to pay CGT on the IP (due to it being transferred from both names to mine)? If so, can I do anything to minimize the impact of CGT owing?
  • Is there anything else I need to consider?

Many thanks!

Totally off track - although heading in the right direction.

If you transfer without consideration the loan cannot be deductible. Interest is only deductible if you borrow to purchase an income producing asset - here you would be borrowing to buy a gift..

Yes, CGT would be payable by the party disposing - which appears to be your wife. She may be able to use the main residence exemption, but new home would then be subject to CGT. She may also be able to claim all costs not otherwise claimed (her share) to reduce the cost base - including interest while living there, light globes, petrol for the power etc etc


Many other things to consider:
1. Succession
2. Serviceability
3. Part IV ITAAA36 - ATO deny deduction?
4. Borrowing 100% plus costs and how to structure this
5. asset protection.

You need to seek legal advice and tax advice before doing this or you will get to the end and not be able to claim any interest.
 
Thanks Terry - sounds like restructuring the loans in the proposed way is a no-go.

I had idea of restructuring in my head because of some advice the accountant gave back when we purchased the new PPOR and turned the old PPOR into an IP. He didn't go into specifics at the time, so perhaps its back to him to clarify.

Am I right in thinking that the only way to maximise interest payment tax deductions in my scenario would be thru selling the IP and purchasing another (with the right loan structure set up from the outset)?
 
T e time, so perhaps its back to him to clarify.

Am I right in thinking that the only way to maximise interest payment tax deductions in my scenario would be thru selling the IP and purchasing another (with the right loan structure set up from the outset)?

Nope.

Why don't you consider buying your wife's interest in the property at full market value and borrow to do so.
 
Terry's 100% correct. Under the CGT rules you are deemed to acquire at market value anyway. So why not give substance to it and actually acquire her interest at market value using borrowed funds ?? It refreshes the loan.. Luckily in Vic they allow this without duty.

CGT - Your wife's share will trigger CGT for her disposal of her 50% share to you. That tax cant be financed and be tax deductible. Run the numbers it may be less tax than you think. Note that your new 50% would have a high refreshed cost base...That might be a good strategy.
Duty - In Vic likely $0
 
Thanks both Terry and Paul - food for thought.

If I buy out my wife's half of the IP, does that mean I forgo the vic stamp duty exemption given the consideration for transfer of title is no longer just "for love and affection"?

Is there anything specific finance-wise that needs to happen re: me buying the wife's share out? ie: Would the loan for the IP have to be in my name only?

Sounds like appointments with account and solicitor are in order.
 
Thanks both Terry and Paul - food for thought.

If I buy out my wife's half of the IP, does that mean I forgo the vic stamp duty exemption given the consideration for transfer of title is no longer just "for love and affection"?

Is there anything specific finance-wise that needs to happen re: me buying the wife's share out? ie: Would the loan for the IP have to be in my name only?

Sounds like appointments with account and solicitor are in order.

stamp duty is exempt in VIC for transfers between spouses.

You should make sure money changes hands and do everything property. Pay particular attention to the asset protection side as well as the tax side. borrow the costs as well.
 
Thanks again Terry, makes sense.

I gather there would be no implications if the wife took her newly-acquired funds from selling her half of the IP to me to then pay off part of the PPOR loan?
 
Thanks again Terry, makes sense.

I gather there would be no implications if the wife took her newly-acquired funds from selling her half of the IP to me to then pay off part of the PPOR loan?

Yes she could do with her cash as she pleases. I don't think Part IVA could apply to this sort of transaction, but it may be a good idea to get a private ruling before doing it.
 
Thanks again Terry, makes sense.

I gather there would be no implications if the wife took her newly-acquired funds from selling her half of the IP to me to then pay off part of the PPOR loan?

Absolutely !!

Its a way of recycling debt from deductible to non-deductible. Its precisely the "refinancing principle" that is common to a unit trust and no other entity. The duty exemption in Vic is what makes it viable. (And in most states make a redemption of units and a reissue not dutiable in a UT) . Dont forget though that CGT still applies so do the numbers first. I have seen some mistakenly calc CGT based on actual cost. The cost base can be affected by other factors so its one to run past your accountant before acting.

Part IVA can be a concern. Why are you doing it ? If the predominant purpose was to recycle debt I see a concern. If the basis for changing ownership is to given improved asset protection it seem viable. ie : debt reduction on your home. The tax benefict can still occur - Just one of the outcomes and not the predominant purpose. Reflect a sole owner on the IP...Again - Why ?

May be worth discussing that concern with your tax adviser and to consider and document your reasoning. Sure a pte ruling can be obtained but its not that iron clad. They are subject to all the facts being valid. They can later assert Part IV and its torn up. Well documented consideration and advice would be of value as a reference point if questions get asked later.

The first line of your orginal post might be fuel for a fire if the ATO did a review. You appear to start with the tax benefit. Rather than the loan structure dont you really mean the ownership structure ?? It drive the deduction. On review when a PPOR becomes a IP many people wish they could change titles.
 
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