using gift as deposit?

[suzieq]

Hi guys, hoping to get some help......My father-in-law is taking a Home Equity Loan out in his name (and we are paying it off P & I and loan set up costs ect) for us to use as our 20% deposit on an IP we are purchasing.

We also need to renovate this property spending about $6,000 which we intend taking from our own Home Equity Loan before it is rentable (to a good standard).

I understand that the interest on the $6,000 we are taking from our H/E loan is tax deductable and the interest on the loan we are taking out for the IP is tax deductable.

Our goal is to get the property re-valued and re-financed say 6 months down the track and pay back the father-in-law, but after reading some of the posts it looks to me like we won't be able to tax deduct the amount we re-pay him as it will be a straight up withdrawal of the money and transfer into the loan he took out to clear things up with him...

Any ideas on how best to use the money he is lending us - maybe the reno's and use our own H/E loan for deposit. Any advice on this would help as I just don't know what to do for the best. Hope this is not too confusing!! sq

 

[abcdiamond]

I'm not a tax expert but the way I see it is:

You are borrowing from Father in Law to pay for part of the IP, this should be tax deductible in the same way as borrowing from the bank.

When you repay him, it should be looked at in the same way as re-financing. And therefore tax deductible.

Keep full records to prove to the ATO if required, and claim all the interest, as it does apply to the purchase of the IP.

 

[Aceyducey]

Suzieq,

Usually only the interest you pay for the use of OPM (Other Peoples' Money) is tax deductible.

In this case if you set it up so you are paying him interest for use of your fathr-in-law's money you should be able to claim the this as a deduction on tax.

Effectively he borrows the amount at X%, you borrow it from him at X% so the net cost to him is zero & you pay the (tax-deductible) interest.

I guess you won't be making any father-in-law OR mother-in-law jokes in their hearing until you've paid it back

Cheers,

Aceyducey

 

[Kristine..]

Hi Susieq

Your heading referred to the money as a gift, but

your post referred to the money as a loan.

In order to qualify for a loan, the gift has to be a gift. Your father in law will need to provide a Statutory Declaration that the money is a gift and does not need to be repaid. Therefore interest and costs do not come into it.

As a loan, all usual loan costs & interest are tax deductible if the property is used for earning income.

You will have to decide what this money really is before you commence.

cheers

Kristine

 

[bundy1964]

Hmmm never been asked where the money is coming from

Low/no docs do have their further joys after all

bundy

 

[Simon]

A lender will need a stat dec if your serviceability does not allow this loan repayment to be included and there is not a 5% deposit already saved, although not all banks need this.

The ATO does not see the stat dec and your father may change his intention as to the money at any time he sees fit. It is really an arrangement between the two of you.

Cheers,