Tax implication on refinancing home loan and gave the equity to siblings

[lolipss]

Hi all,

Would like some advice, i have the following scenario.

1. Have full paid property value at 650k
2. Want to refinance the home and take the equity of the property for 500k
3. Put/borrowed the 500k to my sister and put it under her home loan ppor property

Now my question is, will i need to pay income tax on the 500k that i took from my property(this property is ppor, but i will turn it to investment property when i go overseas soon) and gave it to my sister to help her home loan repayment?

Any advice is appreciated

Thank you

 

[Peter_Tersteeg]

You won't pay any income tax on equity drawn from your PPOR. It's not income and there's no CGT on owner occupied property anyway.

You also won't be able to claim deductions on this loan when you turn it into an IP, as the purpose of the funds wasn't investment purposes.

I think you might also have a little trouble getting $500k cash out of the bank in the current environment. It's possible but not easy.

 

[lolipss]

You won't pay any income tax on equity drawn from your PPOR. It's not income and there's no CGT on owner occupied property anyway.

You also won't be able to claim deductions on this loan when you turn it into an IP, as the purpose of the funds wasn't investment purposes.

I think you might also have a little trouble getting $500k cash out of the bank in the current environment. It's possible but not easy.

Thanks for answer,

So you saying when i rented my property, the 500k interest wont be tax deductible is that right?

But what if i refinance my home loan and told the bank is for investment to buy shares, the 500k interest on the loan become tax deductible when i rented this property is that correct?

Thanks pt_bear

 

[shiftyphil]

Thanks for answer,

So you saying when i rented my property, the 500k interest wont be tax deductible is that right?

Yes, that is right.

But what if i refinance my home loan and told the bank is for investment to buy shares, the 500k interest on the loan become tax deductible when i rented this property is that correct?

The money would be tax deductible as long as you held the shares. It has nothing to do with what you do with the property.

What matters is what you do with the money you borrow, not what security you use to secure the loan.

 

[coastymike]

A few issues

1. What security will your sister be providing over the loan you make to her ? Will her bank allow you to place a registered charge over her property ? I don't think your bank is going to be happy for you to withdraw 500k from the equity on your home to lend to your sister. Particularly in the current environment.

2. What interest rate are you going to charge your sister ? If no interest rate then are you going to incur the interest expense on her behalf ? Where is your benefit ? If you do lend at a commercial rate to her you wil have interest income and interest expenses for tax purposes so although the intereSt would be deductible you would also have interest income to declare.

3. Interest will not be deductible just because you tell the bank it is to buy shares and do not do so. The bank will want to know what shares for that amount. So you commit bank fraud but still do not get a deduction. Bank then finds out you haven't purchased any shares and calls back the loan. What does your sister do ?

4. What happens if your sister decides to sell the property and tell you to go jump and forget getting your loan back. Again what is the security ?

5. Sister meets guy or has a partner. She dies and partner inherits house. He tells you to go jump because he wasn't even party to the loan. Again what protection.

Personally I don't think the bank will lend you 500k from your equity tO lend to your sister. You are also exposing your asset to significant risk.

 

[lolipss]

thanks for the input,

actually, the bank doesn't care what I do with the money as long as I can support that 500k loan ( this is what the home loan manager from NAB said to me)

so basically if i charge interest to my sister, the interest on my property for 500k become tax deductible then. And I guess I can charge any interest amount that I want to my sister for example 0.01%?

how does parents investor doing it here, when they take the equity from the ppor and gave it to their childen for helping their home loan, and at the same time the parent move out from their PPOR and changing it to investment property and move to their children PPOR and live together with their children there but still can get the tax deduction from their interest on their PPOR that become investment property?

 

[Terryw]

5. Sister meets guy or has a partner. She dies and partner inherits house. He tells you to go jump because he wasn't even party to the loan. Again what protection.

With this one the sister's estate will still have a debt owing to the lender and the loan would be payable. This would be the case even without a written agreement, though it would be a messy experience trying to get the money back. There may also be competing creditors. Generally debts are paid first and then property inherited.

 

[coastymike]

Terry

That was my point. Without a written loan agreement in place between the parties the sister's partner will be arguing the amount was a gift not a loan and was never required to be repaid. Just a generous sibling. Agreed a nice mess to get one's self into with an agreement in place.

Maybe the partner finds this thread and sees the words "put/borrowed the $500k to my sister". So what was it ? "Well I am sure your honour that she intended it to be put to the sister. She even had a post indicating that she would borrow the funds to put to the sister. Is the word "put" a "gift" or a "loan". I am but a simple man and I am sure Ellie said this was a gift. I don't even recall her signing any loan agreement" Ohh what fun.

 

[Terryw]

Yes, good point!

 

[Sheryn]

Hi all,

Would like some advice, i have the following scenario.

1. Have full paid property value at 650k
2. Want to refinance the home and take the equity of the property for 500k
3. Put/borrowed the 500k to my sister and put it under her home loan ppor property.

I am no expert but can only see financial disadvantage to yourself and no tax advantage.

Now my question is, will i need to pay income tax on the 500k that i took from my property(this property is ppor, but i will turn it to investment property when i go overseas soon) and gave it to my sister to help her home loan repayment?

Any advice is appreciated

Thank you

No tax advantage available to you only financial tax disadvantages.

I reckon you are going to blow about 2 million dollars of your own money without being able to claim a tax deduction as you will have to pay off the 500K you borrow and you will have blown the 500K you gave to your sister.

Hope you are rich.

Seek legal and financial advise from your lawyer and accountant.


Regards
Sheryn

 

[rugrat]

Bottom line: If you are withdrawing money to give/lend to your sister to put on her PPOR - You will not be able to claim interest on this money. AT ALL. no buts, if or maybe's. The intention for the money is not considered investment purposes by the ATO, so it is not deductible - even if that property becomes an investment later on down the track. It is the reason that money has been drawn and what it has actually been used for, that decides its deductibility - not was it is secured against.

Don't listen to your NAB manager. He just wants to sell you his product. He just want to put you in more debt. He has no speciality in tax law, or loan structuring (clearly from what you have said he has said). Even many accountants get confused about this issue. If you don't believe what people are saying on this forum, ring around and find an accountant who deals regularly with property investment and seek out their opinion on this issue BEFORE you go ahead with your plan. It will save you a lot of greif later with the ATO.

Aside from that, there is certainly issue in regards to loaning your sister the money. I know she is family, and you are just trying to help - but if you are still insistant on going down this path, ensure you get a proper mortgage drawn up to protect your interest: because all you are essentially doing is getting her to swap from being mortgaged to the bank to being mortgaged to you.

If you fail to do this, then there are all sorts of legal complications that can arise innocently, even if you and your sister remain best of friends for the rest of your lives.
And truthfully, I can see no real benefit to either her and certainly not yourself in this senario at all.

The road to hell is often paved with the best intentions...

 

[Terryw]

Loli

What is it that you are trying to do here?

My reading of you post is that you want to borrow to lend to sister so she can pay out her loan in full. I also think your purpose in doing this is because you think you could claim the interest on this loan and help your sister get rid of her non-deductible debt at the same time.

I think some of the other posters have assumed this as well.

But, you may be doing this for another reason completely.

 

[Ed Barton]

thanks for the input,
so basically if i charge interest to my sister, the interest on my property for 500k become tax deductible then. And I guess I can charge any interest amount that I want to my sister for example 0.01%?

no you can't.

why doesn't your sister get her own loan?

 

[Terryw]

how does parents investor doing it here, when they take the equity from the ppor and gave it to their childen for helping their home loan, and at the same time the parent move out from their PPOR and changing it to investment property and move to their children PPOR and live together with their children there but still can get the tax deduction from their interest on their PPOR that become investment property?

The parents could not claim the interest in this situation. This is because the borrowing was of a personal nature.

 

[lolipss]

Loli

What is it that you are trying to do here?

My reading of you post is that you want to borrow to lend to sister so she can pay out her loan in full. I also think your purpose in doing this is because you think you could claim the interest on this loan and help your sister get rid of her non-deductible debt at the same time.

I think some of the other posters have assumed this as well.

But, you may be doing this for another reason completely.

Hi Terryw

Exactly, that is my only intention.

 

[lolipss]

thanks you all for the answer, I have learn a lot.

I wont go ahead with this idea then, because it is impossible for me to have the interest on my property home loan become Tax expenses if i borrowed the equity money to my sister home loan.

Cheers All

 

[Sheryn]

thanks you all for the answer, I have learn a lot.

I wont go ahead with this idea then, because it is impossible for me to have the interest on my property home loan become Tax expenses if i borrowed the equity money to my sister home loan.

Cheers All

Lolipss

Good decision!


Kind Regards
Sheryn