How would one go about accessing equity from a third party to use for their own investment purposes, ensuring the interest on the funds were recognised as tax deductible?
Using someone else's equity - tax deductibility.
- Thread starter Richard Feynman
- Start date
Only 2 ways really.
1. Use their property as security for your loan.
2. Borrow from them.
1 may be difficult unless you are spouses or a director/company relationship.
2 is more straight forward. To be able to deduct the interest you should have a written loan agreement.
Jointly buying with them would also involved either one or the other of the above.
Thanks all. No joint ownership to worry about.
My initial thinking was that I'd have them borrow the funds and then I'd borrow from them (with a written agreement in place) so I'm glad to know it'll be that simple.
Curious. Anyone actually done this?
My initial thinking was that I'd have them borrow the funds and then I'd borrow from them (with a written agreement in place) so I'm glad to know it'll be that simple.
Curious. Anyone actually done this?
Very common. I do one for clients every few weeks - set up loan agreements and give legal and tax advice. I don't lend my own or other client's money as too risky.
And, you would be surprised how many people lend money to others without any written agreement in place. Last week I had a broker who had lent $150k to a client who couldn't settle on the loan - one year ago and he still hasn't gotten any money back, and the borrower was a complete stranger!
And, you would be surprised how many people lend money to others without any written agreement in place. Last week I had a broker who had lent $150k to a client who couldn't settle on the loan - one year ago and he still hasn't gotten any money back, and the borrower was a complete stranger!
With the stranger, where re they currently with getting the money back?
I have a friend, 26 years old, who lent $42k to a friend with no written agreement, the friend proceeded to 'lose it', and with some good legal advice she has been able to recover $20k but the other person has stopped making the fortnightly repayments. You can ask why do it, but its done.....
Same deal with $150k....Why? they just do, lets hope they can get the money back.
anyone got a spare 150K they want to lend to a complete stranger.... well it is the silly season..
Lets use bitcoin....
Gives new meaning to the term..
They have a good chance of getting it all back as it was used to purchase property. Not an ideal situation. They did it to help the client out and like most people once they have the money they are in no hurry to give it back.
Terry, could you elaborate a bit more on the tax implications of the above?
For case 1:
Is it correct that the interest on the loan would be 100% tax deductible for the investor (providing it's use to buy an IP), and the 3rd party would receive no tax implications?
In the case of part ownership, is it required that all names that have part ownership be listed on the title? If so, and if ownership changes from 50/50 to say 60/40, will CGT and stamp duty be required?
1. Borrower gets the deduction, doesn't matter about the security or who owns it.
2. Legal ownership means name on title. But I guess one or both could be acting as trustee for someone else. It is the owner that gets the deduction, in proportion of the property they own. If A owns it as trustee for a trust then it would be the trust that gets the deductions.
CHanging legal ownership percentages would mean:
a) CGT
b) stamp duty (in most states)
c) new loans or loans reassessed
d) tax issues - would the increase be A buying more property from B, if so did A borrow to do so and would the interest on this loan be deductible (maybe, depending how it is done).
Whoever you pay the interest to will have to declare it as income on their tax return.
Marg
The loan could be interest free (or even below CPI)? Then you could use it to effectively shift tax deductability from the investor to the 3rd party (who could be in a higher tax bracket), which may be beneficial in certain family situations..
If the loan is interest free, there's no tax deductibility issue, is there?
There is a lot of strategies you can do with private loans - both for asset protection and tax savings.
e.g. you could gift money to a discretionary trust and then borrow it back with the trust taking a second mortgage and charging interest - these funds could then be diverted to lower income tax payers.
Have to be careful with it all though.
e.g. you could gift money to a discretionary trust and then borrow it back with the trust taking a second mortgage and charging interest - these funds could then be diverted to lower income tax payers.
Have to be careful with it all though.
There is if the 3rd party took out a loan, secured against their property, in order to lend money to the investor. The 3rd party still have to pay interest on the amount borrowed against their property, while the third party pays no interest.
Jon, think you are confusing things here. The 3rd party would have contract with the investor, separate to the lender. If the third party onlent this money interest free they would still have to pay interest to the bank - but could not claim this.
I think you are talking about the 3rd party onlending at the same rate and not making a profit?
If so, would this be a commercial transaction? If i give mortgage my house with Westpac and borrow at 5% but lend to you at 5% without taking any security there are many issues here.
