Vanilla PPOR to IP - No offset

[halcior]

The things I have learned from reading this forum these past few days.. Just wish I had read it a couple of years ago. Apparently seeking tax advice is something that everyone should consider doing before buying something as simple as their first home.

I seek some comments on my (not unusual) situation.

My wife and I are joint owners of our PPOR, bought in 2011 for $330k. We put down a 20% deposit to avoid LMI and have a loan with ING Direct that has a redraw facility. We have been paying extra into the loan such that the loan balance is now $190k. We have never redrawn from the loan, only paid in extra.

My wife and I are both on PAYG incomes in Victoria and neither of us own a business.

We are likely to be moving in the next 12 months and would like to properly structure our future property transactions. We do not necessarily need to move into a new PPOR, and may rent for a period when we leave our current PPOR. Ideally, we would like to turn our current PPOR into an IP.

After reading through many threads on this issue, there seem to be the following options available to us:

1. Sell the PPOR on market. Buy a new IP with a new loan. Assuming equivalency, $330k deductible loan (incur transaction costs selling/stamp duty buying)

2. Sell 50% of the property to one spouse. $260k deductible loan (50% of current $190k loan + 50% of $330k market price)

3. Setup a unit trust. Wife and I borrow to purchase units. Trust then buys the property. $330k deductible loan (or more with deductible costs included)

My wife is a lawyer, so there may be benefits in having a trust structure in terms of asset protection should she become a partner in the future. I plan to investigate my own business venture in the next 12-24 months and could benefit similarly.

Surely the situation that I am in, with two PAYG earners and the desire to convert a PPOR to an IP is extremely common.

 

[Terry_w]

unit trusts offer little to no asset protection.

Selling to one spouse who buys is very effective in VIC because it is possible that there is no stamp duty, but make sure it is done at full market value - there was one forum member who did it for love - and was unable to claim a deduction on that love.

Ask you lawyer wife to look into the claw back provisions of the bankruptcy act and also resulting trusts and constructive trusts in bankruptcy - but don't let her bill you for it!

 

[halcior]

Thanks for your response Terry.

Unfortunately my lawyer wife does not specialise in Wills & Estates or Tax law. Her eyes glaze over at mere mention of the word 'trusts'.

I take it that a trust is unlikely to be a suitable structure in this scenario?

Are these questions best directed at a lawyer? If so, in what speciality? Or should these questions be directed at an accountant or financial planner? Happy to seek professional advice.

 

[Terry_w]

Thanks for your response Terry.

Unfortunately my lawyer wife does not specialise in Wills & Estates or Tax law. Her eyes glaze over at mere mention of the word 'trusts'.

I take it that a trust is unlikely to be a suitable structure in this scenario?

Are these questions best directed at a lawyer? If so, in what speciality? Or should these questions be directed at an accountant or financial planner? Happy to seek professional advice.

A trust may be suitable, it is just not as simple as saying 'i will transfer to a discretionary trust'. you need to plan the set up of the trust, the transfer and the ongoing administration of the structure. this is all legal advice - lawyers specialising in structures.

Tax agents can assist with the tax side of things.

 

[halcior]

I have been doing some more reading as I like to be a somewhat informed client before seeking professional advice. With reference to my earlier statement

Surely the situation that I am in, with two PAYG earners and the desire to convert a PPOR to an IP is extremely common.

Isn't this sort of transaction done frequently such that a typical scenario can be explained in this forum?

From my reading, it seems that a unit trust would indeed be a suitable structure within which to complete this transaction. What am I missing that means that this is not the obvious answer?

 

[Peter_Tersteeg]

From my reading, it seems that a unit trust would indeed be a suitable structure within which to complete this transaction. What am I missing that means that this is not the obvious answer?

No asset protection and having to pay full stamp duty on the transaction. You need to assess if the tax deductions are worth it.

 

[Brady]

You are asking alot of tax questions which is great, but I can't help with those...
But before you go into that have you thought about why you are wanting to keep the existing property?


Is the existing PPOR that you would like to turn into a IP a suitable IP?

When people purchase a PPOR its usually an emotional purchase...

Does the property stack up as an investment?

Do you see CG in the not to distant future?

Is the property good for a tenant? Low maintenance?


Or are you holding onto the property becuase of the emotional attachment?


Would you be better off financially better off selling and purchasing an IP elesewhere?

 

[halcior]

The main reason for keeping the current property is to minimise transaction costs. The second reason for keeping the current property is that it saves me substantial time that would be used searching for an alternative IP.

The property was originally purchased to live in for a few years then rent out. However, I did not research the implications of doing this before getting to where I am today. There are no emotional reasons for keeping the property and I may well sell it if there isn't a way to structure the debt as deductible.

 

[halcior]

No asset protection and having to pay full stamp duty on the transaction. You need to assess if the tax deductions are worth it.

Yes, so taking asset protection out of the equation it comes down to whether the additional deductions that are able to be accessed are worth more than the applicable setup/ongoing and stamp duty costs.

I will do some numbers on that.

 

[Rolf Latham]

and was unable to claim a deduction on that love.

one would expect that

ta
rolf