Transferring equity

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From: Toyo Spares


This is possibly a naive question. My apologies if it is, I'm new to all this.

I currently own my own primary residence outright. It is a unit.
I wish to upgrade to a bigger and better primary residence (a house) but also wish to keep the unit as an investment due to its capital gain potential.
With the interest on the new house being non tax deductible (due to it being my primary residence) I wish to transfer the equity from my unit into the new house thereby minimising the loan for it and giving me a tax deduction on the resultant investment loan in the unit.
e.g. it's like selling the unit to myself and buying it with an investment loan at the same time as buying the new house with the proceeds of sale from the unit and an owner-occupier loan.

Is this possible ?

Am I missing something obvious ?

What are the implications ?

Toyo
 
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Reply: 1
From: Duncan M


No straight-forward answer.. If you wish for the 2 properties to remain in your exclusive name then the only answer is No..

If, however, you're prepared to start using something like a Discretionary Trust then the Unit could indeed be purchased by the trust giving you the funds to put into your new residence. If the resulting loan would result in your unit making a loss then you wont be able to get any tax relief from it as the loss stays in the trust (but can be set off against a future profit)..

Of course, the major problem with this is that you would be liable for the costs of transfering the property into the Trust including Stamp Duty and the increased legal costs that come about when Trusts and Company start coming into the equation.. Banks start getting twitchy and lawyers start getting involved to examine Trust Deeds etc..

Perhaps you might also look into establishing a Trust and purchasing your new home into it with the intent of renting it back to yourself (all within the context of an arms length transaction with commercial rents etc).. If you had some other positive cashflow investments (share portfolio etc?) then putting that into the trust would be a wise move given that your new house will probably make a loss for the Trust)..

As always, seek appropriate legal and financial advice from competent professionals (of which I am not..)

Regards,

Duncan
 
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Reply: 2
From: Rolf Latham


Hi Toyo

As a straight out transaction, what you want to do is possible BUT will not provide the tax deduction you are looking for.

If you borrow money against your unit to purchase an owner occupied home, then the purpose of the money is personal and is therefore not tax deductible.

Find a good broker, and an accountant. The advice is relatively cheap compared to the risks of inappropriate structures.

Ta

Rolf
 
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Reply: 1.1
From: Toyo Spares


Thanks Duncan. I thought it would be a little more complicated. Here I was hoping that the ATO would be happy with the bank simply structuring two loans. One as a 100% investment loan against the unit but actually used to fund the new house and the other as an owner occupier loan for the remainder of the new house. If only life were that simple.

I was trying to avoid trusts etc. because of the complexity and costs involved but also because the tax deduct ability didn't flow through to reducing my PAYG tax. But then again, when I look at the overall picture, perhaps this is only a minor consideration.

Interestingly, when I visited a financial planner last year he also raised the issue of trusts. It came up several times when discussing IP and also my share portfolio. It then raised it's head again when discussing asset protection. He suggested moving assets into a trust of which I and my company (of which I am the sole shareholder) are the trustees. If divorce occurred, trust assets cannot be touched as they are not my personal assets. The disadvantage of this was that the negative gearing benefit of property etc. is lost as I cannot claim trust losses against my PAYG income.

He stated the costs involved would be -
Shelf company will cost $800 to set up
$200 for trust and $200 per year for annual returns.

If I understand this correctly, assuming I shift my share portfolio into the trust, if I bought the new home in the name of the trust and then rented it back for a nominal fee then the trust would make a loss on the house which could in turn be offset by the dividends etc. of the share portfolio.

I assume then the trust would have to pay capital gains on the house when it was sold ? At what rate (i.e. same as me or limited to 15% etc. like Superannuation funds etc.). This may be an issue because if the house was in my name then, as a primary residence it would be exempt.

This still leaves my PAYG with no deductability. Maybe I should examine my determination to get some PAYG deductability.

Toyo
 
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Reply: 2.1
From: Toyo Spares


I understand what you are saying but that is not what I am trying to do.

Basically I own the unit and wish to keep it as an IP and also buy a new primary residence (a house).

I wish to minimise my non tax deductible borrowings (i.e. the loan for the house) and maximise my tax deductible borrowings (i.e. a loan for the IP).

To do this, I need to transfer my equity from the unit to the house.

e.g. my unit is worth $150k and I want to buy a house worth $350k. I would like a $200k non tax deductible loan on the house and a $150k tax deductible loan on the unit (as opposed to a $350k non tax deductible loan on the house and then paying income tax on the rental income from the unit).

It's the same as me selling the unit, buying a new house and then also going out and buying an IP. The IP in this case just happens to be purchased off myself.

I think Duncan has hit the nail on the head.
 
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Reply: 2.1.1
From: Rolf Latham


Hi

Not knowing much about structures etc. would it not be cheaper in the long term to actually transfer title to yourself at a slightly lower cost, and pay the stamp duty ?

Moving assets around between structures would require payment of a stamp duty anyway ?

I would be very interested as to how you solve your situation because I have many clients in exactly this situation, that would love an alternative. Mostly they sell up and buy something else.

As yet, No one has been able to give a real life example of how they have dealt with this without getting around the transfer costs.

Ta

Rolf
 
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Reply: 1.1.1
From: Duncan M


>I understand this
>correctly, assuming I shift my
>share portfolio into the
>trust, if I bought the new
>home in the name of the trust
>and then rented it back for a
>nominal fee then the trust
>would make a loss on the house
>which could in turn be offset
>by the dividends etc. of the
>share portfolio.

Almost correct.. The transactions between you and trust have to be on a commercial basis, you cant charge a nominal rent, it has to be the market rent.

You need to look most carefully at the issue and speak again to an accountant etc.. You also need to look at Redman vs the FCT as it was the test case for the style of transaction..

The whole thing is a little contrived in some ways.. Some future ruling could well go against you :)


Regards,

Duncan.
 
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Reply: 2.1.1.1
From: Duncan M


Slightly off topic.. but interesting none the less; In SA an assett in a Trust can be transferred to a beneficiary for a nominal stamp duty of $10..

Duncan..
 
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Reply: 2.1.1.1.1
From: Michael G


Duncan,

can it be done the other way?, ie transfer an asset into a trust for a small fee when then title holder and beneficiary are the same?

Michael
 
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Reply: 2.1.1.1.1.1
From: Duncan M


Michael, good question.. I will try and find out.. Given that the beneficial ownership hasnt changed one would presume it might be possible.. I'll call the Office of State Revenue on Monday and pose the question.

Regards,

Duncan.
 
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Reply: 2.1.1.1.1.1.1
From: Michael G


Great,

If that's the case I check with NSW and if not request a ruling or something.

Michael
 
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Reply: 3
From: Mike .


Hi Toyo,

Your situation resembles the following scenario I posted a few weeks ago:

Q. We own an investment property in need of renovation. We currently rent and would like to buy a home. Should we sell the investment property or renovate and keep it?

A. If you have reasonable equity in the investment property and you borrow against it to buy a home you could end up with a large (non-deductible) home loan and a smaller investment loan, which some investment advisors, would argue is the wrong way around. The most financially effective cause of action would be to sell the investment property, buy home using all available cash, then use equity to re-invest. Yes, you have to live with the transaction costs, but at least your borrowings are then properly structured and servicing your home loan is not chewing up your cash-flow so you can move on to do more with your resources!

Me again: Unfortunately, you can't transfer equity from one property to another, as far as I know. Which is why you have to sell for cash, then buy again with cash to have maximum equity in non-taxdeductible property. Then borrow against this equity to fund taxdeductible IP purchases. Personally, I think this is better for you anyway because since you have a large amount of equity you can fund multiple IPs instead of just one. As other savvy investors have suggested, you use equity to open a Line Of Credit with which to pay the 20% deposit for each IP. The IP secures the remaining 80%. This way, the IP's are self-secured.

Hope this helps.

Regards, Mike
 
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