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Hi Nit,
I personally wouldn't open an SMSF with less than $150,000. At that rate of funds, your fees would be about 1% of your SMSF assets.
The other factor, when borrowing for property in an SMSF, with $40,000 and a 70% LVR, you could only afford to pay $133,333 for a property.
Simple answer, no. If you each own 25%, then the income and expenses are split 25%.
Banker wrote:The biggest cause (in my opinion) to the financial crisis in the US was and still is non-recourse lending.Most loans are and were non-recourse which means if the bank sells the property for 300k and you owe them 400k – you are not liable for the 100k difference. Therefore when the market crashes you can hand in your keys with no consequence to your other assets. In the US banks had so many keys being dropped off some had key boxes installed at the doors.
100% agree. Yet this fundamental difference is never mentioned by the doom-and-gloomers, when they predict similar price falls for the Australian market.
I'm not sure where the opening post went. It has been edited for some reason. It was a question about hiding the legal / beneficial owners of an asset.
I'm not sure what number 8 is up to…..
You could look at something like a Bare Trust.
A Bare Trust is a trust where the legal and beneficial ownership is split. The trustee has legal ownership, the beneficiary has beneficial ownership. A bare trust gives the beneficiary the rights, so that he/she can instruct the trustee, and the trustee acts on the wishes of the beneficiary. Basically the trustee owns the asset for you.
I heard of one example of successfully using a bare trust. One farmer had his property on the market, his neighbour wanted to buy it. Problem was, the neighbours did not get along, and the prospective buyer believed he would have to pay a much higher price if he were to buy it in his own name. Neighbour (buyer) organised for the formation of a bare trust, with a friend as trustee. He purchased the property through the bare trust, the seller was none the wiser. Apparently the look on the sellers face, when he found out who bought his property was priceless.
Hi Amanda,
Regardless of when you refinance, the test for deductibility of interest is, what are the borrowed funds used for?
If you use the funds as a deposit for your PPOR, then the interest will not be deductible.timbo. wrote:The only way I can use that money is to sell Prop 1 and pay any CGT and then I can do whatever with the balance. Which brings me to another question:
If I purchased Prop 1 as an IP in 1999 and have lived in it for the past 2 years (it is currently my PPOR), do I still have to pay CGT?
You would have to CGT on a portion of the sale.
eg: Bought in 1999, lived in for 2 years, CGT percentage = 9/11 = 81.8%
timbo. wrote:Conclusion:
What I am trying to do is use capital growth of an investment for non investment purposes and still claim deductions on the interest. Essentially, this is the same concept (and consequently – flaw) as Living Off Equity.
The tax laws are like swings and roundabouts. You can have an interest deduction for your investment property, but you pay CGT on the sale. If there is no investment (etc, PPOR) then there is no deductions.
You can't expect to get the deductions (swings) without having to pay tax when income or capital gains are made (roundabouts)
Assuming $300k of the loan for prop 1 was used to buy property 1.
The extra $100,000 you have borrowed against prop 1 (400-300) is used to purchase prop 2, your new PPOR. Therefore interest on the $100,000 is not deductible.
Interest on the $300k, assuming it was used to fund the purchase of prop 1, or other income producing assets, is deductible.
The offset adds an extra wrinkle, but GENERALLY, funds pulled out of the offset will not affect the deductibility of the loan attached. (Which is why people have offsets).
Terryw wrote:Another point – if you have $100,000 to lend to a trust then this is already available to potential creditors. But tying it up in a trust makes it more complicated and possibly less likely that someone will a) notice it and b) go after it.I agree. Also, in my scenario above, the trust could borrow the $100,000 and payout the creditors, meaning the trust asset does not have to be sold.
Banker, as I've pointed out before, there IS asset protection in the trust.
Sure, if person A loans money to the trust, and person A goes bankrupt, that money loaned to the trust is available to the creditors. I get that.
But if the asset was not in a trust, THE WHOLE ASSET is available to the creditors.
eg – Asset book value $500,000 (current value $750,000) – Loan from bank $400,000, Loan from Person A $100,000
Person A goes bankrupt. If asset is in trust, creditors can get $100,000
If asset is not in trust, creditors can sell $750,000 asset.Which would you prefer???
Hi timbo,
The short answer is, the deductibility of interest is determined by what the borrowed funds were used for, not the security offerred. If you are borrowing to buy a new PPOR, then the interest on the new borrowing, regardless of the security, will not be deductible.
Any interest you are still paying on the loan for prop 1, will become deductible when it is available to be rented out.
You don't want to go to court, all that will do is cost you money. I'm not sure whether he can cancel the agreement, you may need to check the agreement and see what it says. Did you both sign it at the time of deciding to sell the house?
Is there anyway your friend can buy out your share?
You don't want to go to court, all that will do is cost you money. I'm not sure whether he can cancel the agreement, you may need to check the agreement and see what it says. Did you both sign it at the time of deciding to sell the house?
Is there anyway your friend can buy out your share?
You don't want to go to court, all that will do is cost you money. I'm not sure whether he can cancel the agreement, you may need to check the agreement and see what it says. Did you both sign it at the time of deciding to sell the house?
Is there anyway your friend can buy out your share?
No, they can carry forward until used up.
Zan wrote:This is all great until you want to protect your assets and think long term by using a trust, in this case a discretionary/family trust. There doesn't seem to be any way of being able to claim for tax deductions on any of the interest that is paid if used in this structure and hence I can't see how it can be used for long term sustainability – you're going to hit a wall very quickly if you can't claim the loses no matter how much equity you have.
In those situations I can only see one way out which is to use the property as security and say you have completely paid off the initial property, you'll be opening up multiple loans for IPs using this one house as security meaning you will end up cross collaterising the portfolio.
Am I missing something?
On your first point. With a family trust, the losses stay in the trust. Over time, as rents increase, the property will eventually become cash flow positive. The losses in prior years are offset against future years income.
Second point – I don't think that is your only option, but I'll leave that to someone more qualified.
number 8 wrote:I really like how we all think the same on this site???? and generally write the same answers?????Take the advice from the two guys above for example, they are correct on one front, the front they are writing about, but so wrong in many other ways….
That is the danger of taking advice when people don't know all your personal circumstances.
But haven't you given advice aswell? Do you know the personal circumstances??
Read the question again. It asks about using an LOC secured against a current property to invest in shares or a new property.
My answer (and Terry's) is there is no problem doing this from a taxation point of view, as the loan is a separate, new loan. I haven't suggested any investment strategy, or loan strategy, just offered an opinion on the loan and tax treatment.
Please point out how I am wrong in 'so many ways'.
A separate LOC used for investment purposes (shares, IP deposit) shouldn't be a tax problem. It will be a separate loan, easily identifiable for your accountant.
I agree with your accountant.
Trusts are not legal entities, the trustee is. So the legal owner of the property will be XX Pty Ltd as trustee for XX Family Trust.
The trust is the TAXING entity, so regardless of the trustee, it will have access to the 50% CGT discount.
Sorry, yes. If it's your PPOR for 80%, you pay CGT on 20% of the gain.
You can only use the valuation method if you live in the property first, then rent it out. As yours was rented from day one, you can only use the proportion method.
