My mother in law is thinking of selling her house to us for $100k undervalue which will give us assess to this equity.This way she is debt free as she is living on credit at the moment and we have a healthy amount of equity to use to purchase postively geared property. The catch is that on paper it is our house but she is the real owner so when it comes to selling the property in say 10 years she pays out the loan and keeps all the profits. We are paying the moratage (she pays half) but she recieves the profits but the way I see it is that we gain a foot back into the market through the $100k equity and by the time she decides to sell we have a healthy property portfilio.
Am i going about it the right way?
I’m not sure that I quite follow the details of your potential agreement – but I think the best thing is to talk to a solicitor and/or tax specialist about your options.
One problem I can see arising – if you are officially purchasing the property today, but will then hand the proceeds to her unofficially in ten years time – is the tax that you personally will have to pay on the sale (when your mother will actually be gaining the money). I think she will also be taxed on the money, as she will legally have to declare it as a form of income or ‘gift’ when filing a tax return. So the house sale will be double taxed in ten years, as well as you paying tax now when she ‘sells’ it to you today.
Instead, you could come to a legally binding written agreement where the house is not sold to you, but she allows you to use the equity in her house to secure investment properties. In exchange you pay off her debts, give her a living allowance, whatever… maybe secured against the house so that when the house is sold you recoop the payments you’ve made to her? I think an arangement like this would be a lot less expensive for both of you.
But – get professional advice. Business deals can get messy at the best of times – but especially when it’s a gentlman’s agreement amongst family. You need to take into consideration what happens if someone dies? If it were, say, your partner (her child) and you went on to remarry… or if she passed away, would other family members be upset about the deal? Or if you lose your job, and then default on the mortgage, and lose the house…? These might be dark topics, but they’re things you need to consider.
Hi Jewel
I would stay right away from that sort of arangement, apart from the short term equity help for you where’s the win/win.
Clay
Let me get my head around this.
1) Mother in law sell you her house for less than market value.
2) You let her live in it, cheap rent? free rent?
3) If you sell in 10 years, you pay out the loan and give her the proceeds?Is that what you meant?
My response:
1) that’s ok, but this may effect her pension, if she has one. And will involve payment legal costs, and stamp duty by you.
2) you may be required to pay tax on the market rent. But this shouldn’t matter too much if you have a mortgage to offset it.
3) You will have to pay CGT (if not your residence). Gifting money to her should have no tax consequence, but would effect any pensions.Sounds like a costly exercise. What about if she just loaned you the money initially, or let you use her property as security.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry
The idea of this exercise is for us to get a foot back into the market without having to go through a 106% loan at an interest rate of 8.55% and for the mother in law to be debt free. My only concern about this excerise is that we will be paying half the mortgage repayment but won’t recieve any profits if she decides to sell. Am I better off to start on a 8.55% loan, build equity then switch to a standard loan or stick with buying the mother in laws house?
It will be vary costly and messy for her to sell. A 106% loan may be an idea if you qualify. Hopefully you can add value quickly and also get some natural capital growth, allowing you to refinance within a short time at a cheaper rate.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry that is exactaly what I thought. I am currently looking at units in Nundah and houses in Ipswich. I know that land is the key to growth but what about the fact that more people are opting for unit living because of security and no garden maintence. Which would be the better option keeping in mind that I want to get out of the 106% loan asap?
Its hard to say. Which do you think will grow faster?
I personally do not buy units. It is land that appreciates, so I think something with a high land content will be better long term.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
If there is trust in the relationship, why will your mother in law not just let you use the equity and you pay her loan for her (assuming you can afford all the finance)?
How much is owing on the property anyway?
What is the property value?
Is there even enough equity left after transfer costs?
Are you a first home buyer and which property will you live in?Robert Bou-Hamdan
Mortgage AdviserRobert
The mother in law owes $250k and the property at worst is worth $350k. I am an investor who sold all 4 properies I had about a year ago and ready to get back into the market. I am trying to avoid a 106% loan if I can. Your suggestion on using the equity and pay her mortage, does that mean that the property will still be under her name? and is it really worth paying half the mortagage (she pays the other half) when at the end of the day it won’t be our property?
I don’t see the point in having the property in your name anyway when she gets all capital gains when it is sold. What happened to the proceeds from the sale of your 4 properties?
I don’t think it is a good move to transfer the property in any case.
To avoid mortgage insurance, you have useable equity of $30,000. After transfer costs, this will drop to about $15,000. You can not buy much with $15,000 to cover deposit and closing costs.
Assuming you wanted to go to 90% on the refinance, you have useable equity of $65,000. Take out the $15,000 in transfer costs and the $5,000 odd mortgage insurance expense, you have $45,000 left.
Assuming you wanted to buy something else for only $200,000, you would need about $50,000 for deposit and closing costs to avoid more mortgage insurance.
As you can see, you will save at least $15,000 and possibly the mortgage insurance if you can get by without having the property in your name for the sake of it.
Robert Bou-Hamdan
Mortgage Adviser
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