Turning an almost fully paid off PPOR into an IP

[Chantal]

Hi everyone (and Dale in particular!),

We're in the situation that we almost totally own our PPOR and also have 3 IP's. One of the IP's is a house that we bought last year with the intention that we would live in it as our PPOR in around 3 years' time.

Our plan is to move into the new house (a current IP) and turn our current PPOR into an IP at that stage. I know that isn't tax effective as the current PPOR is almost paid off, and the interest on our new PPOR (current IP) won't be tax deductible once we move into it, but our current PPOR is such a great property that we can't bear to part with it!

Someone has mentioned to me that when we are ready to move into the proposed PPOR (current IP) we can create a family trust and provided the trust can get a loan, we can sell our current PPOR (new IP) to the trust. We then get the cash which we can use to pay off the new PPOR (using an offset account in case we decide in the future to rent it out again) and the trust can rent out the old PPOR (new IP) which will be far more tax effective.

The questions I have are:

1. Can we do this?
2. If yes, is this the most tax effective way of handling the situation?
3. If yes, and we use a standard family trust, I understand that we can't negative gear the new IP but we can use a hybrid trust to do this - is that right? And if so, is this a standard thing to do?
4. I assume that the trust will have to pay stamp duty on the purchase?

Thanks very much to anyone who can help!
Chantal

 

[DaleGG]

Originally posted by Chantal

Someone has mentioned to me that when we are ready to move into the proposed PPOR (current IP) we can create a family trust and provided the trust can get a loan, we can sell our current PPOR (new IP) to the trust. We then get the cash which we can use to pay off the new PPOR (using an offset account in case we decide in the future to rent it out again) and the trust can rent out the old PPOR (new IP) which will be far more tax effective.

The questions I have are:

1. Can we do this?
2. If yes, is this the most tax effective way of handling the situation?
3. If yes, and we use a standard family trust, I understand that we can't negative gear the new IP but we can use a hybrid trust to do this - is that right? And if so, is this a standard thing to do?
4. I assume that the trust will have to pay stamp duty on the purchase?

Thanks very much to anyone who can help!
Chantal

HI Chantal

Yes, you can do this and yes, a hybrid trust will allow you to negatively gear the property and have the advantages of using a trust.

I'm afraid that stamp duty is likely to be payable a 2nd time though when you move it from your own names to that of the trust.

Good luck!!!!!!!

Dale

 

[Chantal]

Thanks very much for that Dale.

We've actually just arranged to see an accountant on Wednesday to run through it all and it's good to know we're on the right track before we start spending all of the money on advice!

By the way, the new site is fantastic and your postings are always very informative, thanks for your contributions!

Chantal

P.S. What state are you based in for future accounting enquiries?

 

[watto]

G'day Chantal,

Dale GG is Melb based and can be found @

http://www.gatherumgoss.com/

I hope this helps.....


cheers
watto

 

[beech]

so Dale for anyone thats ever contemplated moving out of fully paid PPOR into one of their IPs,can basically set up trust,sell PPOR to trust with the new money coming from the bank,.
paying off your ex IP(now ppor) and then SHAZAAM you have shifted non deductible debt to deductible debt via trust of course.
Is this as simple as it seems Dale?



thanx Darren

 

[DaleGG]

Originally posted by beech
so Dale for anyone thats ever contemplated moving out of fully paid PPOR into one of their IPs,can basically set up trust,sell PPOR to trust with the new money coming from the bank,.
paying off your ex IP(now ppor) and then SHAZAAM you have shifted non deductible debt to deductible debt via trust of course.
Is this as simple as it seems Dale?

thanx Darren

Hi Darren

Yes, it is as simple as that. No CGT because it is the sale of your former PPOR, but, stamp duty will apply which muddies the waters a little.

Have fun

Dale

 

[Chantal]

Just one more question Dale - do you know if we are able to set this up by selling the property to the trust and then stay in the property, renting it (for market rent) from the trust until we are ready to move into the house? Or would that not be kosher with the ATO?

 

[DaleGG]

Originally posted by Chantal
Just one more question Dale - do you know if we are able to set this up by selling the property to the trust and then stay in the property, renting it (for market rent) from the trust until we are ready to move into the house? Or would that not be kosher with the ATO?

Hi Chantal

It is fine for you to do that. I suggest documenting how you arrived at the market rent just in case they ask questions though . . .

Have fun

Dale

 

[AMH]

Hi all,

Very interesting, could someone please enlighten me on what a "hybrid trust" is?

Anne-Marie

 

[DaleGG]

Originally posted by AMH
Hi all,

Very interesting, could someone please enlighten me on what a "hybrid trust" is?

Anne-Marie

Hi Anne-Marie

A hybrid trust is a cross between a family (discretionary) trust and a unit trust.

Havee fun

Dale

 

[AMH]

Thanks Dale,

So why doesn't everyone purchase their "negatively geared" properties using a hybrid trust?

Is my interpretation correct in saying that you can offset the deductions against your other income in the early years and then when the property becomes cashfow positive you can distribute the income via the family trust?

What are the advantages/disadvantages of the hybrid trust compared to the ordinary discretionary trust?

Anne-Marie

 

[paulzag]

Hybrid Trusts are newer in design. Generally they are a discretionary trust whose deed allows for the creation of "special units" which behave like units in a unit trust.

For the structure to hold up I think special units would have priority for income and capital and/or have guaranteed returns.

Because they are new 1) not too many people know about them and 2) not a lot of case law on them.

1) isn't a problem
2) might be if a flaw in drafting the deed is found.

Regards

Paul Zag
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