Whose name for IP?



From: Funky Whuff

Hi all,
Just a newbie here, interested in the best structure from any old-timers (tee-hee, just kidding!) - no advice I understand, just opinions! My little sis is moving to Melbourne in January and we (the fam) are thinking of purchasing an IP for her to rent ... no law against renting to your family is there??! Nextly, my mother is going to be putting down the deposit and making up the difference in interest repayments as she is working and wants a good IP to store spare cash in (along with super). However, she is likely to retire in about five years (maybe a few more), and so I think the best structure would be to borrow the finance in mine and my partner's names so that my mum doesn't incur CGT when she sells the property to us (which she would do as any tax deductions would no longer be useful as she is no longer earning an income on retirement). Does anyone have any ideas on this/done this before and have any opinion on how the best way would be to go about it. It should be no trouble obtaining finance from our point of view as we have six months ago settled our owner-occupied townhouse which are currently paying triple the repayments on fortnightly. Thanks!
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Reply: 1
From: Eddy Morris

Hi Liz..just a little advice. There should be no problem renting to a relative provided they are paying market rental.

Sounds like your best option is to put it in you & ur partners names. As far as Mum is concerned: if in doing her "numbers" it looks as though she could completely pay off the property by the time she retires, then she would have a regular income (rent) from her investment. For Mum it might be better to talk to a financial planner...im just an accounting type person with a strong interest in IPs thanks to Jan S.

Good luck,
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Reply: 1.1
From: Funky Whuff

Thanks Eddy,
That's just it, my mum is the worst number cruncher you've ever seen! Living in south east rural Vic, she doesn't have access to a lot of fin planners who own many properties... i have the responsibility for number crunching.. and i'm not sure she'll be able to pay it off by the time of retirement...
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Reply: 1.1.1
From: Michael G


Just a thought. Any financial arrangement, especially among family, involving large sums of money and especially over long periods of time, should be documented in some manner.

Plans are all well and in the beginning, but always prepare for the worst case scenario.

What happens if Mum needs her cash back quick, for, heavens forbid, a medical emergency?, can she cash her interest out quickly?

Just a thought
Michael G.
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Reply: 2
From: Terry Avery

Hi Liz,

I am a bit confused about what you are proposing but first, yes you can rent
to a relative if the transaction is at arm's length. This means placing it
with an agent who places a market rent on the property. Your sister signs a
lease with the agent and pays him rent. The rent is taxable but the agent's
fees are deductible as are rates, insurance and so on. The added benefit is
the depreciation on the building and furniture which will balance out the
cost of an agent. You could just rent it to your sister at below market and
pocket the cash but you couldn't claim rates, insurance and depreciation
plus it would be tax avoidance, a big no no. My opinion, not advice, is that
you are better off keeping everything legal and above board.

Now your second question on ownership. Do I understand you correctly? You
and your partner will have the title and loan in your names, effectively the
owners but mum will pay the deposit and the repayments? How can mum sell the
property to you when you already own it? Your name is on the title, just
because she makes payments does not give her ownership to sell to you. I
think the ATO would view her payments as a gift to you. How would your
mother get an income from the property which she has sold to you (but does
not own), there does not seem to be any return in it for her.

It seems like you are trying to be too clever over something which should be
simple, let her buy it in her name and own it. As I said in the beginning I
don't comprehend what you are trying to do, please explain!


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Reply: 2.1
From: Funky Whuff

Hi Terry,
A couple of things in answer to your answers...! Yes, the title and loan would be in my and my partner's name and mum would put up the deposit and repayments (quite willingly). And the whole point is, she would not sell it to me if the arrangement was like this, i was saying it would be done like this because once she stops earning an assessable income (she is 61 - retire in about 5 years) then she will not be able to claim tax deductions against her income anymore. In order to maximise tax deductions, we were then planning she could (if title was in her name) sell it to us (me and my sister), however this would incur CGT payable by mum. This is why it would be in my and my partner's names to start off with, so that the property doesn't have to be sold to incur CGT. My mum will not, on retirement, have the income to continue to make repayments, as she currently has no assets to speak of excluding her house. And to Michael, the return in it for her is that we can revalue it or draw down on the equity for cash if she ever needs it (or I can give it to her...!), and I intend (once building up my portfolio), to provide any money for my mum if she should ever need it anyway! So, I hope this makes it more clear, and I'm interested to hear your opinions....
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Reply: 2.1.1
From: Terry Avery

Hi Liz,

I can see you are trying to help out your mum but again you have said the
title and loan would be in your name. Therefore what deductions do you think
your mother can claim when she has no "interest" in the property. By
interest I mean she has no title so she doesn't own the property. The loan
is not in her name so she cannot claim the interest as a deduction, but you
may be able to. Without the title I cannot see how she could claim anything
else as a deduction.

Are you focussing too much on having a negative geared situation? If the
property was positively geared (by your mum having significant equity in it)
then the deductions would balance out the income earned and if properly
structured may provide an income in her retirement. Do not be so focussed on
a tax deduction to the exclusion of a profit. It is better to pay the taxman
and have a profit than to be out of pocket. If your mum falls into the
pensioner bracket then her tax rate will be low and with one property she
could make a profit and still qualify for a pension. Combined they may give
a higher income than just the pension.

On the other hand, if she has enough to be a self funded retiree then there
are generous tax concessions available so she may not have to pay any tax or
a very low level. In either case she will want to minimise the expenses of
holding the property, especially interest so paying off the loan quickly
while she is working could be a viable strategy. You will also need to
decide do you want a property with a high yield to give an income or do you
want capital gain.

Unfortunately there is a lot about your mother's financial situation that is
unknown and it would be inappropriate to discuss details on a forum. You
should consult a property friendly financial planner to assess how best to
fit in with your mother's retirement plans. However, I think most financial
planners would advise against a risky plan of negatively gearing at her age.

Whatever you decide you have plenty of time and you do not need to rush a de


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Reply: 2.2
From: Dale Gatherum-Goss

Hi Terry

Actually, your statement to Liz that says:

"yes you can rent to a relative if the transaction is at arm's length. This means placing it with an agent who places a market rent on the property. Your sister signs a
lease with the agent and pays him rent. The rent is taxable but the agent's fees are deductible as are rates, insurance and so on"

is completely wrong!

The tax office do not, have not and never will, impose such restrictions. Yes, they require that the rent is at market values, but, that is as far as it goes.

It is quite common and quite acceptable for the landlord to determine market rents through the use of local newspapers and a letter or two from a local real estate agent to determine the market rent. So long as they keep copies of this information to prove the point, there can be no problem at all.

I hope that this helps

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Reply: 3
From: Dale Gatherum-Goss

Hi Liz!

This is a common problem that I see all the time. In fact, by identifying it yourself, you have already leaped ahead of the herd. Well done!

The problem is that we have two conflicting goals. The first is the immediate tax relief through negative gearing for the next 5 years. The second is the desire to avoid CGT on the sale of the unit. Unfortunately, you cannot have both in such simple terms.

So, I would normally advise that you determine which goal is the stronger of the two. If it is the first, then accept that there is a CGT in a few years and run with that strategy.

CGT is not that bad and particularly if it is planned cleverly. For example, if your mum takes the immediate tax advantages available now and sells the IP to you after she is retired, she will be able to claim the first half of the gain as exempt. Then, the balance of the gain will be taxed on top of her other income which may be nothing more than the pension. If this is the case, then she will pay tax on the gain left over after the first 50% exemption.

Furthermore, the government have recently made more changes (pre election) that allows pensioners to earn a little more before they are taxed.

Based on this, lets crunch a couple of numbers as an example . . .

Mum buys the place now for $200,000. In five years she sells the IP to you for the market value (important) at say $300,000.
We'll ignore stamp duty, legal fees and other such costs for now in the desire for simplicity.

The first 50% of the gain is tax free and so mum will pay tax on $50,000 (ie, $300,000 sale price less $200,000 purchase price = $100,000, then less 50% exemption)

This $50,000 is added to her pension income of say $11,000.

So, mum pays tax on $61,000. The result is a tax bill of just under $17,000.

So, she now has the tax benefits over the next five years. A minimum of $100,000 in her pocket at the time of retirement and she'll have to give some of that $100,000 to the government.

I hope that this helps. There was some more good advice in one of the other posts about documenting everything and I agree wholeheartedly.

Have fun

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Reply: 3.1
From: Asy .


Just one small question, what happens if you-and-your-partner become you-and-your-ex-partner?

S/he will be able to claim some right to the property since their name is on the title.

I know you will say, "but we have been together for x-years", but stranger things have happened (Trust me, I know...).

Just thought I'd add some salt to the soup...

asy (disguised as prophet-of-doom)

There are no problems, only solutions which have not yet been discovered.
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Reply: 3.1.1
From: Sergey Golovin


If your mum will buy and keep that IP on her own name, after she retired she might get pension from the superannuation fund and income from the property.

Now, how much is pension and how much is income from the property? $11K+$11K=$22K?
How much would be tax on it, remember that she is pensioner? 15%? $3,300? Could be, but she will be left with $18700 on hands, which is about $360 week clear (almost double) instead of $200 or something.

Just a thought.

But folks are right you have to go to an accountant, with or without your mum and sort it out properly.

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From: Funky Whuff

Thanks all,
you've been most helpful! I guess that my mum would be better off owning the property outright, it makes more sense I think, and would be better for her to have the income. I really appreciate all the time you put in to help me out here! BTW, anyone know a good accountant???! What about you Dale, are you in Melbourne? Remind me!
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Reply: 2.2.1
From: Terry Avery

Thanks Dale for clarifying that. I was always under the impression you had
to go the extra yard to ensure you were not unwittingly breaching the ATO


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From: James Spry

I know this is late.... but I only just read your discussions.

Have you thought about some sort of family trust? If it's a discretionary trust it allows you some flexibility in allocating distributions to the beneficiaries. You can also allocate part or all of the capital to beneficiaries (if/when the trust is wound up) separate to income distributions. It may be a way of everyone owning a piece of the pie, and being able to eat it too....

But I've never bought property using a trust, and I'm not a financial adviser, solicitor or accountant, so I can't give you advice. (Actually I'm an engineer, so that's the only thing I can legally give you any advice on.) Try reading Nick Renton's book on Trusts, it's quite good.

Anyone out there have any more suggestions?

Hope that helps,

Jim Jim the monkey boy
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