Using capital losses against properties

[tonyc00]

Hi

We (spouse and myself) have a mix of shares and property. The properties are doing great, but we took bath in 2007-2008 on the shares. Thus we are carrying a capital loss which we would like to use (since it is gradually being eroded in real terms).

The easy answer would be sell the properties and match the gain (from the properties) with the carry forward (share) losses. But we love the properties and don't want to lose possession.

And if we sell and buy back the properties, the stamp duty + legal fees will kill us.

Query can I transfer my share of the properties to my spouse, and she transfers her share to me. And hopefully the transfers will trigger the capital gains, but without the stamp duty. The legal fees we don't mind.

Alternatively, can anyone suggest a property tax accountant in Sydney who could provide advice in this matter, and has ideally had to deal with a similar type situation.

Many thanks as always.

Tony

PS I'm happy to share the general advice once I receive it (for the benefit of other forumites who might be in a similar situation.)

 

[datto]

Heck, we can't even sell and buy back shares to realise a capital loss! Don't like your chances. The ATO just dont like tax minimisation schemes.

 

[alexlee]

Heck, we can't even sell and buy back shares to realise a capital loss! Don't like your chances. The ATO just dont like tax minimisation schemes.

TA 2008/7 states:

The type of wash sale arrangement this alert covers is where a taxpayer disposes of, or otherwise deals with a capital gains tax (CGT) asset to generate a capital or revenue loss


Here, the OP is looking to create capital GAINS to offset an existing capital loss, so it would seem to not be an issue under TA 2008/7.

Having said that, does it really make sense to deliberately create a taxable gain when you don't need to, when that capital gain might otherwise be deferred decades into the future (i.e. if / when you sell)? Noting that whatever 'gain' you're offsetting against the loss in today's dollars will also decrease in real terms if, instead, you realise it in the future.

 

[Rob G.]

Here, the OP is looking to create capital GAINS to offset an existing capital loss, so it would seem to not be an issue under TA 2008/7.

It is within the ambit of Part IVA because you are resetting your cost base which is a "tax benefit".

 

[Terry_w]

Hi

We (spouse and myself) have a mix of shares and property. The properties are doing great, but we took bath in 2007-2008 on the shares. Thus we are carrying a capital loss which we would like to use (since it is gradually being eroded in real terms).

The easy answer would be sell the properties and match the gain (from the properties) with the carry forward (share) losses. But we love the properties and don't want to lose possession.

And if we sell and buy back the properties, the stamp duty + legal fees will kill us.

Query can I transfer my share of the properties to my spouse, and she transfers her share to me. And hopefully the transfers will trigger the capital gains, but without the stamp duty. The legal fees we don't mind.

Alternatively, can anyone suggest a property tax accountant in Sydney who could provide advice in this matter, and has ideally had to deal with a similar type situation.

Many thanks as always.

Tony

PS I'm happy to share the general advice once I receive it (for the benefit of other forumites who might be in a similar situation.)

Transfer of property is a dutiable transaction so duty would be payable if the properties are located in NSW. In VIC it may be possible.

Something like this needs careful planning. Transfer without consideration could destroy the deductibility of interest.

 

[Melbournian]

there is no stamp duties btw spouses in vic. parents did it some time back.

 

[Paul@PFI]

Leaving the Part IVA problem to one side there may be a serious tax concern you could trigger with interest deductibility. Lets assume you have a IP and its worth $500K and your original loan was $300K and its IO. Its owned 50/50. Its in Vic and the spouse transfer exemption does apply.

1. Your bank needs to approve it. Thats highly probable EXCEPT if the loan is in your name and the IP will end up in your spouses name. There is a need for a guarantor. They may refuse. Especially when the apparent reason is to change tax outcomes. Their legal people wont want part of it.
2. Lets assume the bank OK's it. They dont advance any extra $. The original loan stands.
3. The title now becomes spouse only and the loan is joint. Thus the nexus between you borrowing $ and the acqusition of the IP is no longer relevant. You have borrowed 50% of the $$ to allow your wife to acquire an IP...Non deductible to you - You cant derive income from your loan. The loan wasnt resettled. Deductible for her share only.

Your problem is getting the bank to payout the old loan and refinance just to spouse.

This is the general basis of the ATO's problem with Hybrid Trusts and loan arrangements where "someone else benefits". (TR 2009/17). Your scheme isnt greatly different to that proposed by some hybrid trust arrnegemnets - Start with a 50% interest each and in time its gets changed.

In such a situation I would be confident that YOU have no deductibility of 50% of the loan interest. Well not without a private ruling from the ATO. Good luck with that ! Plus a taxable capital gain based on market values (Market Value substitution rule applies). So a transfer cant be valued at $0.

This is an area where you should get specific tax advice.

There is/was an option available in NSW relating to creating trust over property in SOME situations. It would affects loans also. If you want to explore that further contact Macquarie Group Services

 

[Aaron_C]

1. Your bank needs to approve it. Thats highly probable EXCEPT if the loan is in your name and the IP will end up in your spouses name. There is a need for a guarantor. They may refuse. Especially when the apparent reason is to change tax outcomes. Their legal people wont want part of it.

Actually banks are fine with it, never had an issue before. Never cared what the reason was as long as the transfer of land doc etc are all above board.

 

[speary]

Not really sure what the over-arching purpose of this is. Your capital losses will carry forward indefinitely so its not like you will miss out on them.

 

[Paul@PFI]

Actually banks are fine with it, never had an issue before. Never cared what the reason was as long as the transfer of land doc etc are all above board.

The issues will actually be more of a concern that the Bank doesnt care. The fact is the loan needs to be phyisically refinanced 100% to the new owner or the deductibility will be tainted. Remember the purpose of the borrowing must be to ACQUIRE an income producing property....If the loan was originally 50% for Dave to acquire and 50% for Mary to acquire then if Dave is no longer an owner then his share of the loan is non-deductible as he does not derive income. You cant "deem" that its his wife's loan now just cause ownership changed.

The arguement I hear is "so what its a joint loan" and a marital asset etc...That is the problem.

 

[Aaron_C]

Well banks do things as per their policy. If they had to check out the intricacies of the tax law that even accountants/lawyers don't even fully understand for a simple investment loan they would never do any business. Besides, their security interest in the property via mortgage would supersede any claims made by the tax office against the borrower for tax dodging so they really don't give two hoots.

 

[tonyc00]

Using capital losses against property gains

Hi

Firstly, many thanks for all the great responses - I am really appreciative that others have taken to time to respond to my query.

Maybe I can respond to some of the matters which were subsequently raised (and in that way, maybe, add to the collective knowledge in this matter).

I think alexlee answered the matter raised by datta - I'm looking to create a capital GAIN - and that is not "tax minimisation".

Likewise I think Rob G. answered speary's query of why bother; because I am looking to trigger the capital losses (which are not indexed to inflation) by increasing the cost base of the asset. I'm still deferring my overall capital gain but now it is a smaller capital gain.

Thus I'm extinguishing the capital losses in todays dollars (as opposed to say 20 years from now when I come to sell the property, and by then, the carried forward loss is worth much less in real terms.)

I don't think TA 2008/7 is applicable because the ruling applies to a single taxpayer states, "This may occur where the interest in the asset is in some way reinstated by the taxpayer". However in my instance, there are two "taxpayers" involved - myself and my spouse.

And Melbournian was right when he said there is no stamp duty between spouses in vic - and that is similar to NSW. Terry_w is no doubt correct when he says "transfer of property is a dutiable transaction", but he may have not realised that the transfer is between spouses.

After considering the forum advice, the proposed arrangement just might be possible.

I'll keep you informed. Again many thanks to all for taking the trouble in responding.

Tony

 

[Terry_w]

Hi

Firstly, many thanks for all the great responses - I am really appreciative that others have taken to time to respond to my query.

Maybe I can respond to some of the matters which were subsequently raised (and in that way, maybe, add to the collective knowledge in this matter).

I think alexlee answered the matter raised by datta - I'm looking to create a capital GAIN - and that is not "tax minimisation".

Likewise I think Rob G. answered speary's query of why bother; because I am looking to trigger the capital losses (which are not indexed to inflation) by increasing the cost base of the asset. I'm still deferring my overall capital gain but now it is a smaller capital gain.

Thus I'm extinguishing the capital losses in todays dollars (as opposed to say 20 years from now when I come to sell the property, and by then, the carried forward loss is worth much less in real terms.)

I don't think TA 2008/7 is applicable because the ruling applies to a single taxpayer states, "This may occur where the interest in the asset is in some way reinstated by the taxpayer". However in my instance, there are two "taxpayers" involved - myself and my spouse.

And Melbournian was right when he said there is no stamp duty between spouses in vic - and that is similar to NSW. Terry_w is no doubt correct when he says "transfer of property is a dutiable transaction", but he may have not realised that the transfer is between spouses.

After considering the forum advice, the proposed arrangement just might be possible.

I'll keep you informed. Again many thanks to all for taking the trouble in responding.

Tony

Hi Tony, I did think it was between spouses. No exemption in NSW for transfers between spouses unless going from one name to both names for the main residence. - There is an exemption for breakdown of relationship too though.