My boyfriend has two properties that are worth around $1million each and are both in a property / discretionary trust. He bought these properties many years ago and they have grown in value substantially. Over the years he has continually increased the mortgages on them to the point where there isn’t much usable equity left in them. This was exacerbated a bit by the properties loosing value a few years ago. After the rental income is taken into account the properties are costing him about $35,000 a year to hold onto. Unfortunately we don’t have the income to make this a viable option.
If he sold the properties and had to pay CGT the amount of tax the cost of the sale would not cover the mortgages and the CGT and he would be left with a fairly hefty tax bill that could take many years to pay off..
Our understanding is that because the properties are in the trust that they will accrue capital gains tax even though he has lived in them over the years. In addition, that he cannot getting any negative gearing tax relief on the amount of money that he is pouring into them each year due again to them being in the trust.
Is this correct? Has he really painted himself into a hole – or is there something that we are missing????
Your thought would be greatly appreciated.
Kylie
Yes, but it may be even worse than you think. CGT would probably apply as well as
What has he done with the excess money borrowed? if he has used it for personal expenses then the interest on this portion borrowed will not be deductible.
Furthermore, if he has used trust assets for personal expenses then he may have breached his various duties as trustee of the trust and/or possibly the Corporations Act if there is a company as trustee.
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
Think about it this way, which is going to leave him with more debt: Selling one of the properties, paying cgt and having to pay of debt for several years or holding onto the properties and having to fund a shortfall?
Quite rightly as Terry points out, what has he done with the equity that he has reborrowed (financed a lifestyle)?
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