Selling an IP from personal name into a Trust

[kegger]

Hi folks

The plan: Sell an IP where I owe $150k to a trust at current market value of approx $320k.

Why?: Asset protection and pay down PPOR debt.

Benefits:
1. Realise capital gain which would pay down some of the debt on current PPOR.

2. Would move the IP into a trust for the purposes of asset protection.

3. Non-deductible debt would be replaced with deductible debt, at a cost of approx $30k.

Costs:
1. Property would then be negatively geared, rather than positive.

2. CGT of approx $30k (if transferred in July 08 this would not need to be paid until approx June 2010 when TRs done by accountant).

The other option is to sell the IP on the open market, which would cost us $30k in CGT anyway but we would no longer have control of the property.

Anyone with any knowledge in this area advise if this is actually allowed etc.

ANyone else see any other issues with this idea. The bottom line is that we must pay down some PPOR debt asap, as cashflow is struggling (not due to interest rate rises, due to debt being TOO BIG !)

All comments and help greatly appreciated.

Cheers

Kegger

 

[Bushy]

Kegger,
There are lots of downsides,

Stampduty on transfer of ownership.

Losses stay with the trust and can't be offset against your income if using a discretionary trust which is meant to be the best for asset protection.

Capital gains tax.

No Land Tax threshold.

I would look at the big picture and see if by transfering your property, you are getting closer to your goals or further away. By the amount of equity that you have is it possible for you to buy another IP and have that one controlled by a Trust.

Our first few IP's were bought in our own names until we realised the advantages of using a trust, but we didn't transfer. The 50k that it might cost you is a lot of rent or capital gain to throw away. Think big, will it matter as much if all your future IP's are in trusts.

Not advice , just ideas.

Regards Bushy

 

[Mofra]

Kegger,

Is it a corporate trustee arrangement? If not, trusts aren't registered onto the mortgage outside of Qld & the territories so there may not be too much point.

If so & you choose to purchase under a corporate trustee later, you can still X-Coll as you will have to provide a director's guarantee for the corporate entity anyway so your guarantee can also include a security guarantee for the existing property.

Cheers

 

[alexlee]

This has a lot of moving parts.

1) Assuming you sell to the trust at the market price of $320k, you're going to have to pay CGT on that.

2) Presumably you then put the $170k proceeds (after the $150k loan) into your PPOR loan. But what's the $ benefit? You save about 30% on the interest because the $170k is now deductible against the IP. At 8.5% interest, that's only about 4k a YEAR. And that's assuming you have the income in the trust to offset the tax losses.

3) You said it's going to cost you $30k to do this. But the benefit of converting $170k of non-deductible debt to deductible debt is only about $5k a year max. Is it worth it?

It doesn't seem to make sense to me to spend $30k to get a benefit of max $5k a year, especially if your objective is to improve cashflow? One big point is that losses will have to be trapped in the trust if you use a family trust. That decreases the tax benefit of deductible debt. I'm not suggesting you do this, but wouldn't it make more sense to, say, refinance the IP and keep the cash around for emergencies, then redo your budget to see if the PPOR debt it too much? If it gets to that, it may make more sense to sell the IP and regroup.
Alex