Hey,
Wasn't sure whether to post this here or in property finance, hopefully I picked the right one.
I have IP1 worth approx 285k with only 35k loan remaining, and IP2 bought last year for 605k with 626k loan remaining (cross collaterised IP1 to lend 107%, no LMI). I intend to move into IP2 mid-late 2014. The properties are both in VIC.
I'm considering selling IP1 into a unit trust at some point before I move into IP2, and use proceeds to help reduce the future non-deductible debt on IP2. I lived in IP1 previously, moved out early 2008 and have not had a ppor since (rented or lived with parents), so should not be liable for CGT if i sell in the next 20 months.
Currently paying around $36k of deductible interest/year, if IP2 becomes my PPOR that will drop to only $2k deductible and $34k non-deductible.
I have an appointment to see my accountant soon, and will probably also talk to a mortgage broker too, but hoping I might be able to get some information beforehand, so I can run some numbers/spreadsheets and check the viability.
So onto questions:
Would I be tempting any tax avoidance issues by doing this? My understanding is this should be OK as long as it is sold for market value?
Ideally, I would like to borrow to buy units in the trust so that I can negative gear against my salary. How does this work in practice? Does the trust need to secure 1 loan to buy the property from me, then I secure a second loan for a similar amount to purchase units from the trust, the trust then uses these funds to pay off it's own loan? Do lenders loan to buy units in trusts at residential rates? What LVR will they lend, both in the trust or for units? Or is the usual practice to redraw equity to borrow for the units to get residential rates (and no questions asked)?
Since the properties are crossed, and there is negative equity in IP2, I imagine the bank will take a large chunk of the sale the reduce the loan on IP2, but hopefully not all of it! The loans are with CBA, do they have a policy that determines how much they would take in this circumstance? eg. reduce loan to 80% LVR? That might still give me 140k or so left over (to redraw to buy units if neccessary).
Roughly what would the costs be to sell into the trust? I have stamp duty, but should be CGT free. My current numbers are factoring a 5k fudge for other costs, discharge fees, trust setup fees etc. does this sound reasonable, or too low?
Can a trust hold it's own units? (This seems to be sensible, but you never know!) eg. If the trust has 10 units for 28k each, I can buy 5 units for 140k (and get half the trusts profit if any), and the trust keeps the other 5 units, and that profit just stays within the trust?
I think that covers my questions (for now). I'm sure there'll be some questions for me which hopefully I can pre-emptively answer with my (possibly flawed) reasonings!
Why unit trust (why not discretionary)? Unit trust seems to be the easiest setup to access negative gearing benefits, this is the main reason. Land tax also seems to be lower in unit trusts (calculated at general rates, discretionary charged at surcharge rates). Asset protection is not a major concern for me at the moment (PAYG employee). Unit trust seems very flexible, when the IP1 becomes positively geared again (in 5+ years), I could transfer/sell the units to my lower income partner, if asset protection becomes a concern I can transfer/sell them to a discretionary trust, later on in life I could sell the units to my SMSF. I believe I can do this without incurring stamp duty as long as the value of the asset does not exceed $1mil.
Rough numbers (once again might be flawed) suggest that I would recoup the stamp duty in 3 years (6k tax refund/yr), and an extra year for the additional costs. After that it's all gravy.
Apologies for the long winded rambling, any advice and suggestions much appreciated!
Cheers
Wasn't sure whether to post this here or in property finance, hopefully I picked the right one.
I have IP1 worth approx 285k with only 35k loan remaining, and IP2 bought last year for 605k with 626k loan remaining (cross collaterised IP1 to lend 107%, no LMI). I intend to move into IP2 mid-late 2014. The properties are both in VIC.
I'm considering selling IP1 into a unit trust at some point before I move into IP2, and use proceeds to help reduce the future non-deductible debt on IP2. I lived in IP1 previously, moved out early 2008 and have not had a ppor since (rented or lived with parents), so should not be liable for CGT if i sell in the next 20 months.
Currently paying around $36k of deductible interest/year, if IP2 becomes my PPOR that will drop to only $2k deductible and $34k non-deductible.
I have an appointment to see my accountant soon, and will probably also talk to a mortgage broker too, but hoping I might be able to get some information beforehand, so I can run some numbers/spreadsheets and check the viability.
So onto questions:
Would I be tempting any tax avoidance issues by doing this? My understanding is this should be OK as long as it is sold for market value?
Ideally, I would like to borrow to buy units in the trust so that I can negative gear against my salary. How does this work in practice? Does the trust need to secure 1 loan to buy the property from me, then I secure a second loan for a similar amount to purchase units from the trust, the trust then uses these funds to pay off it's own loan? Do lenders loan to buy units in trusts at residential rates? What LVR will they lend, both in the trust or for units? Or is the usual practice to redraw equity to borrow for the units to get residential rates (and no questions asked)?
Since the properties are crossed, and there is negative equity in IP2, I imagine the bank will take a large chunk of the sale the reduce the loan on IP2, but hopefully not all of it! The loans are with CBA, do they have a policy that determines how much they would take in this circumstance? eg. reduce loan to 80% LVR? That might still give me 140k or so left over (to redraw to buy units if neccessary).
Roughly what would the costs be to sell into the trust? I have stamp duty, but should be CGT free. My current numbers are factoring a 5k fudge for other costs, discharge fees, trust setup fees etc. does this sound reasonable, or too low?
Can a trust hold it's own units? (This seems to be sensible, but you never know!) eg. If the trust has 10 units for 28k each, I can buy 5 units for 140k (and get half the trusts profit if any), and the trust keeps the other 5 units, and that profit just stays within the trust?
I think that covers my questions (for now). I'm sure there'll be some questions for me which hopefully I can pre-emptively answer with my (possibly flawed) reasonings!
Why unit trust (why not discretionary)? Unit trust seems to be the easiest setup to access negative gearing benefits, this is the main reason. Land tax also seems to be lower in unit trusts (calculated at general rates, discretionary charged at surcharge rates). Asset protection is not a major concern for me at the moment (PAYG employee). Unit trust seems very flexible, when the IP1 becomes positively geared again (in 5+ years), I could transfer/sell the units to my lower income partner, if asset protection becomes a concern I can transfer/sell them to a discretionary trust, later on in life I could sell the units to my SMSF. I believe I can do this without incurring stamp duty as long as the value of the asset does not exceed $1mil.
Rough numbers (once again might be flawed) suggest that I would recoup the stamp duty in 3 years (6k tax refund/yr), and an extra year for the additional costs. After that it's all gravy.
Apologies for the long winded rambling, any advice and suggestions much appreciated!
Cheers