Using someone else's equity - tax deductibility.

[alexlee]

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.

The 3rd party can't deduct interest paid. If they're willing to do that, why not just gift the money to the investor?

 

[jon2378]

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.

I'm talking about a 3rd party onlending to make a tax deductable loss.
I.e. 3rd party borrowing at 5% and onlending at say 4%. It would be done as a commercial transaction. The 3rd party would be required to pay interest of 5% to the bank they mortgaged their property with, and the investor would be required to pay 4% to the 3rd party.

The money that was onlent to the investor would be secured against the IP with which the investor used the onlent money to purchase.

* The 5% interest payable by 3rd party to the mortgaged bank is tax deductible (as it's used for investment purposes - a commercial loan) - loan is secured by 3rd party's PPOR.
* The 4% interest payable by investor to 3rd party is also tax deductible - loan is secured by investor's IP.

This way, the 3rd party is effectively taking 1% of the investors interest, which would be beneficial if investor was in a lower tax bracket and had a close relationship with the 3rd party, e.g. family member.

Am i not understanding something here? Is it perhaps that the 5% interest payable by 3rd party is not tax deductible?

 

[jon2378]

The 3rd party can't deduct interest paid. If they're willing to do that, why not just gift the money to the investor?

Why can't 3rd party deduct interest paid? If they take out a mortgage and onlend the money through a commercial loan, why isn't it tax deductible?

 

[alexlee]

Why can't 3rd party deduct interest paid? If they take out a mortgage and onlend the money through a commercial loan, why isn't it tax deductible?

If you deliberately structure it so that you're on-lending at a loss, it's hard to argue that it's an arms length commercial arrangement. Especially if it's to a family member. Deliberately creating a tax loss would likely invalidate or limit the deduction.

 

[Terry_w]

I'm talking about a 3rd party onlending to make a tax deductable loss.
I.e. 3rd party borrowing at 5% and onlending at say 4%. It would be done as a commercial transaction. The 3rd party would be required to pay interest of 5% to the bank they mortgaged their property with, and the investor would be required to pay 4% to the 3rd party.

The money that was onlent to the investor would be secured against the IP with which the investor used the onlent money to purchase.

* The 5% interest payable by 3rd party to the mortgaged bank is tax deductible (as it's used for investment purposes - a commercial loan) - loan is secured by 3rd party's PPOR.
* The 4% interest payable by investor to 3rd party is also tax deductible - loan is secured by investor's IP.

This way, the 3rd party is effectively taking 1% of the investors interest, which would be beneficial if investor was in a lower tax bracket and had a close relationship with the 3rd party, e.g. family member.

Am i not understanding something here? Is it perhaps that the 5% interest payable by 3rd party is not tax deductible?

Lets use an example.

Tom has a property with a LOC set up. He borrows $100,000 at 5% and lends it to Jerry.

If he lends to Jerry at 4% this would not be a commercial transaction as Tom would be losing 1%. It wouldn't make sense and the interest probably wouldn't be deductible to Tom or he may be able to claim 4%. Jerry could claim the interest paid to Tom (which would be income to Tom).

 

[marg4000]

If he lends to Jerry at 4% this would not be a commercial transaction as Tom would be losing 1%. It wouldn't make sense and the interest probably wouldn't be deductible to Tom or he may be able to claim 4%. Jerry could claim the interest paid to Tom (which would be income to Tom).

Or if it really hits the fan the Tax Dept could claim this was deliberate tax avoidance with consequences all around.
Marg