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Hi James,
Thanks for your post, and thanks Terry for replying.
I receive a lot of requests for help and further information about trusts, so with this in mind I've drafted up a reasonably comprehensive answer that I hope helps members.
==========BUYING PROPERTY==========
Most people who buy property use a portion of their cash reserves to fund the deposit and also closing costs.
The balance needed to pay out the vendor is then normally financed via a loan secured by a first mortgage over the property (e.g. a home loan).
A typical situation is to pay 20% of the purchase price as deposit in cash (+ closing costs) and then finance the remaining 80% of the purchase price via some sort of loan or finance.
==========ENTITY==========
A property can only be purchased by a separate legal entity, which means that only people or companies can be property owners. What about trusts then?
Well, a trust needs a Trustee (who can only be a person and/or a company) to act on it's behalf, since a trust does not have separate legal entity status in its own right.
Therefore, a trust cannot buy property or borrow money in its own right… however the Trust Deed, which is the rules the Trust must operate under, will typically give the Trustee the power to buy assets and borrow money on behalf of the Trust.
This is why banks require a copy of Trust Deeds before lending – to make sure the Trustee has the power to borrow on behalf of the trust.
When buying property using a trust the correct legal way to note the purchaser is <Trustee Name> As Trustee For <Trust Name>.
For example:
If the Trustee is an Individual:
Fred Smith As Trustee For The Fred Smith Family Trust
If the Trustee is a Company:
Fred Smith Pty Ltd As Trustee For The Fred Smith Family Trust
==========BORROWING IN A TRUST==========
Earlier I mentioned that typically 80% of a property's purchase price is financed through a loan and 20% (plus closing costs) is paid in cash.
But what about when the Trust has just been created and doesn't have any cash reserves? This is the situation you describe James.
In this case, instead of there being one loan, there will be two (or more) loans.
Loan 1: To a financier for the (presumably) majority portion being borrowed of the purchase price (e.g. 80%)
Loan 2: To the person or entity lending the remaining money needed to settle the purchase (e.g. 20% + closing costs).
For example:
Let's say you are setting up the James Family Trust, and have set up James Pty Ltd to act as Trustee and you want to purchase 123 Red Street for $200,000.
XYZ Bank has agreed to lend you $160,000 (80%), however you still need $40,000 (20%) plus another (say) $10,000 to cover closing costs such as legals, stamp duty etc.
If you were buying the property in your own name then you would simply use your cash reserves, or else tap into other finance options if appropriate and available (e.g. line of credit against a home).
However, the assets of the trust and the assets of the Trustee / Beneficiaries are not accumulated – they are owned separately.
Therefore, a second loan is needed from James to the Trust to cover the 20% plus closing costs needed to settle.
The journal entries in the books of the various entities involved in the transaction would be:
A. The Lender
Dr: Loan – James Pty Ltd ATF James Family Trust $160,000Cr: Cash $160,000
B. James
Dr: Loan – James Pty Ltd ATF James Family Trust $50,000Cr: Cash $50,000
C. James Pty Ltd ATF James Family Trust
DR: Property 123 Red Street $210,000CR: Loan – XYZ Bank $160,000CR: Loan – James $50,000
==========LOAN IN A TRUST==========
Once upon a time loans to/from Trusts were notional only, however the ATO has cramped down on this and now loans need to be more genuine, which includes having a formal loan agreement and charging interest (even if that interest is capitalised).
In the above situation, because James is lending and gaining interest on his 'investment loan', the interest on that loan is tax deductible.
Furthermore, because 123 Red Street is an investment property, the interest paid by the Trust to the financier and James will be tax deductible too.
==========DEBT FORGIVENESS==========
Finally, a debt forgiven may trigger a capital gain. For more information on this complex topic, see an accountant or check out what's written on the ATO's website:
http://www.ato.gov.au/individuals/content.asp?doc=/Content/36559.htm
Warm regards,Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Be aware that Dean & Elise are working on Reno Toolbox II. It is still about 3 months away at the earliest though.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
You should be able to buy the game from http://www.powwowevents.com.au
The -ve cashflow cards are there for those who want to speculate on growth. In the US, it is much easier to buy +ve cashflow properties, so why would you -ve gear? Things are different here as property prices are a lot higher relative to rents.
That said, I made my fortune on the back of +ve cashflow houses in regional areas. I read an article recently that if values drop and rents rise then the days of +ve cashflow may return. Until then, you have to try and make your +ve cashflow rather than seeking to buy it.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
If memory serves me correctly you have a number of years in which to live in your father's house and still be able to claim the RROP exemption against your own home.
Quote from the ATO website: see link
If you do use the dwelling to produce income – for example, you rent it out or it is available for rent – you can choose to treat it as your main residence for up to six years after you cease living in it.
That is, the property will be CGT free if you sell it within six years of moving out.This is a complicated area of tax law though, so I recommend getting good advice.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
Normally when doing renos as a business, there is no capital gains as the entire profit is treated akin to business income (that is – like salary for businesses).
When doing renos as a private investor you could probably do one or two every few years, but after that you would have an argument with the ATO to say you were not in the business of renovating for profit.
That said, everyone has their own tax situation, so it is hard to know how much tax you will need to pay.
Nevertheless, tax should be a consideration and I will ask Dean and Elise to include it in Reno Toolbox II which is currently in production.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
If you're in WA and are looking to do renos in central Vic I have to ask why!?!
If it's because properties look cheap then I would caution you to watch out against false economies. Trades in central vic can be hard to find and can be expensive. Furthermore, if you are trying to manage the job remotely then you will face additional time and management hurdles.
The best way to handle a reno is to become an area expert, manage the trades locally, and be on hand to pick up the pieces as unexpected things happen.
That said, the following areas in regional Vic are seen as expanding (no order):
Mildura, Geelong, Wodonga, Ballarat, Bendigo
Again, there will be good and bad opportunities in each of the above – and you can be sure that the locals have picked over any 'great' deals well before they hit the market.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Gosh.
That's a complicated and tricky question.
Let me get this right… you want to buy a property off the plan using a deposit bond, and then you want to assign your right to purchase to a third party and then get them to take over your deposit bond, or get a new one?
Hmmm.
A couple of thoughts:
1. Make sure you can assign the right to purchase in the first place. You wouldn't want any recourse against you if the person you assign to doesn't settle.
2. The idea of a deposit bond is that the bank guarantees that you will be able to come up with a deposit on settlement. If you then assign your right, I can't see why you need the deposit bond anymore as the new purchaser takes over that obligation to give a deposit on settlement. That is, when you assign the person taking up the contract will need their own deposit which should then eliminate you.
3. Carefully read the terms of the deposit bond. I doubt they are able to be transferred.
4. Be careful about the stamp duty implications of what you are doing.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
Sites of this kind with a good tenant usually attract strong bids from institutional buyers.
I would call the agent (and commercial agents in the area) to ask what yield similar properties have sold for.
That said, agents are telling me commercial yields have softened over the past 6 months, but that there is not the volume of sales to confirm it.
At a guess, I would expect a 6 to 7% yield.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Coming back to the question again….
Who knows where the government is at with policy issues. I would have thought that Trading Emissions is a higher priority though, at least until interest rates rise further or we get closer to the next election.
I am in favour of tweaking the tx rules on NG. My suggestion would be that you can no longer offset the 'loss' from negative gearing against salary income. However, you can carry it forward to offset against future capital gains.
However, the danger of doing anything is that it will tip the housing market over and Aus will follow the US in a housing-led recession. Don't underestimate how much money people have tied up in their homes. If home prices fall then the consequences will be significant.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
I disagree about the deductability of interest on land.
Provided the land was bought for investment purposes – that is, with the view to making a profit – then why wouldn't the interest be tax deductible?
To quote from the tax ruling
6. The deductibility of interest is typically determined through an examination of the purpose of the borrowing and the use to which the borrowed funds are put
Furthermore, the tests put forward in the tax ruling are:9. It follows from Steele that interest incurred in a period prior to the derivation of relevant assessable income will be 'incurred in gaining or producing the assessable income' in the following circumstances:
- · the interest is not incurred 'too soon', is not preliminary to the income earning activities, and is not a prelude to those activities;
- · the interest is not private or domestic;
- · the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income earning activities involved, that the necessary connection between outgoings and assessable income is lost;
- · the interest is incurred with one end in view, the gaining or producing of assessable income; and
- · continuing efforts are undertaken in pursuit of that end.
I would say therefore that there needs to be some clear nexus between the property and the intended future assessable income. For this reason, I would see an tax accountant before buying the property.
In summary, there mere fact that you are buying land will not preclude you from gaining a tax deduction for the interest, however it does raise questions that need consideration and planning with a good tax accountant.
Cheers,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
It's good to ask questions and I always encourage it.
First up, with the start of the latest RESULTS program, a lot of my time is being spent writing materials and answering questions of late. You will notice though that I did a short 5 min video about my thoughts on the current property market.
I'm also making good on some long awaited promises in terms of writing the content for the Advanced MasterClass pack.
Aside from that, I have a number of property projects on the go and they are keeping me busy too. No point writing about investing if I am not doing it myself!
Finally, in terms of Dean's seminar – I understand concerns about value of 'paper as such' I mean the real cost of an A4 sheet is about 5 cents in paper and maybe 2 cents in ink. But if the knowledge on that paper can help you make $10,000, or save you from disaster then it is worth a lot more.
I see it as the cost of eductaion. $695 is pretty reasonable for a one day seminar, and the templates are free bonus items.
I'll be at the Melbourne seminar with a pen and notepad as I'll be keen to learn from Dean. His systems make a lot of money and those who come along will be in for a treat.
Thanks for the post and all the best.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
You've made a good first draft. Some comments to help you improve include:
1. Headline needs to be shorter and punchier. Example: Hands Up If You Want A Great Investment?
Remember the headline exists to attract attention and to help you stand out from the noise.
2. Hmmm – not sure I would use your first line as a leader. What if I'm not sophisticated? If you want to go with this angle then tweak it. Perhaps 'Finally. The opportunity of a lifetime that a smart investor will snap up fast.` At this point you are building interest.
3. Seems to me that this is a set and forget type investment. I`d play on that… sit back and watch the rent roll in (that could be your headline). Go with the growth angle and try to turn features into benefits.
A unique opportunity to acquire an A Grade asset in one of Australia`s most desireable locations with record high growth.`Of course, this needs to be true!
Remember that you want to build desire, but also leave the reader wanting to call to find out more. You could close with…
This is a great deal. How great… Call now to find out!`
Keep working through it. You`ve made a great start. Well done.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
I recommend you read this site: http://www.propertyinvestment.net.au/tax-deduction.htm
Stamp duty is a capital cost and added to the value of your property. Lender's mortgage insurance is a borrowing expense and can be written off over the shorter of the life of the loan or 5 years.
Cheers,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hey Jason,
Welcome back to the site.
Okay, some ideas for you…
1. Do you remember who your solicitor who handled your purchase? S/he will have a file in archives that they can pull and find out the information.
2. You should be able to get the rates you are after by getting in touch with the NSW Office of State Revenue. Their contact number is 1300 139 814All the best,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hey Jim,
Sounds like a golden goose deal. Well done.
You would be best to see an accountant here, but I think that provided you bought the property as an investment with a goal of making a profit then the fact that it has gone up so much in value provides a reasonable argument for claiming the interest on a loan used to buy that investment property.
As for reducing the CGT, well, provided you are structured properly then you should only have to pay tax at your marginal rate at 50% of the gain. Definitely go and see an accoutnant for some tax planning though to see if you can take advantage of any rural allowances (don't know if there are any, but worth a try).
Well done again on your deal!
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Dan,
My first comment involves making sure that you use the right terms when dealing with the bank/lender. The situation that you describe above is not vendor financing. What you have described is a second mortgage arrangement.
Vendor finance as such is a form of funding where the seller (vendor) holds some or all of the sale price back in the form of a loan back to you. However, unlike a regular sale, the title does not immediately transfer but instead remains with the vendor until the loan is repaid.
Therefore, it is natural for your lender to reject vendor finance as you have described it because they do not have a title to secure it against.
It sounds like the better option here is as you have described, with the sale taking place, title being transferred, first mortgage given to the normal lender, and then the seller (no longer the vendor as such after title transfers) having a second mortgage.
Now, this is a legal question for a lawyer, but I'm not sure if you have to tell the first mortgage holder that you are getting a second mortgage. However I do know that you'll need to be careful though and read the first mortgage loan doc carefully to see what your discloure obligations are (and whether or not you are allowed!) to get a second mortgage.
If there is any mortgage insurance on the first mortgage then this may complicate matters.
Naturally, don't do anything illegal.
Hope this has helped.
All the best with the deal.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hey there Emily.
How did the conference go?
I'm actually attending an internet marketing conference in Canada right now!
I agree that reading books is the best place to start… that's what I did.
I'd also make a start with some tentative investing, and if it's related to the stockmarket, get your hands on Louise Bedford's books.
Property is more intense in that you have to deal with more people, but you can also make a lot of money if you know what you are doing. Perhaps take a look at API magazine as there are articles from time to time from people less than 25 who do well from property.
I would also like to commend you on your attitude. Well done and all the best.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
Forgive the technical terms, but…
You can claim the depreciation on your investment properties as a deduction against your assessable income, thereby reducing your taxable income.
If you like, the amount of your tax shield is: Depreciation Claim * Average Marginal Income Tax Rate.
Let's look at an example to flesh this out, assuming the following:
Salary: $80,000
Rent: $20,000
Deductions: $25,000
Depreciation: $13,000In this case, your assessable income is $100k ($80k + $20k), and your allowable deductions are $38k ($25k + $13k). Therefore your taxable income (Assessable Income – Allowable Deductions) is $62k ($100k – $38k).
The amount of the tax shield of the depreciation can be worked out as follows:
Tax on Taxable Income of $75k ($80k + $20k – $25k) = $17,850
Tax on Taxable Income of $62k ($80k + $20k – $25k – $13k) = $13,950Tax saving on $13,000 depreciation claim = $3,900
Hope this makes sense. Thanks for drawing me back in to my deep dark accounting past!
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi,
Thanks for your questions about RESULTS. I'll try to answer them.
1. About RESULTS
Some years ago I became aware that people desired more than just a seminar. After careful planning we released the RESULTS mentoring program where participants have access to an experienced property investor to coach/support and mentor them over 12 months.
We don't provide instant pills or magic solutions – but we do know property very well and have been able to now assist hundreds of people to get substantial financial outcomes from their property investing.
The RESULTS from the program do vary, and pretty much what you put in is what you get out. Some have outstanding experiences. For example, one participant presented her deal at the last get together that has an expected profit of $2.9millon. If only all deals were like that!
On the flip side, there are some that do the program who do not acquire any property. This is not a failure though as everyone goes at their own pace and our job is to help rather than act as a drill sergeant.
The outcomes you achieve depend largely on your vision, plan, strategy and how much action you take.
This is not a get rich program. It is structured and comprehensive training by professionals where we aim to transform your life by working with you 1-on-1. There is nothing like it on the market.
2. Pricing
I agree the pricing is confusing and I apologise for that. This year we allowed people to pre-register and this has caused additional complexity.
To cut to the chase though, the reduced price for those who pre-register before the deadline expires (at https://www.propertyinvesting.com/results2008prereg2) is $6,490 (if you pay upfront) or $6,690 if you pay over three instalments.
3. Instalments
You can either pay upfront (slightly cheaper) or over three instalments of $2,230. The first payment is due now, the second payment is due 15 June and the third payment is due on the 15th August.
4. Other Costs
The cost covers the following:
A. Direct 1-on-1 mentoring over 12 months
B. Access to structured training including over 400 pages of written material, CDs, DVDs, Webinars etc.
C. 5 One-day (10am to 4pm) Mini Seminars exclusive to RESULTS participants
D. And many other benefits and privileges.Note: We are not accountants, solicitors, architects etc. We will help you to brainstorm solutions, but we are not replacements to professional advisers in specialist fields. Having said that, we know a lot and will help you as much as possible within our areas of expertise.
5. Mentor Contact
You can phone or email your mentor as you like or need. Some people also call in to the office from time to time and enjoy a coffee.
It is quite hectic in the first 60 days, but after then things really settle down. It would be highly unusual not to be able to get in contact with your coach (or the coaching panel) within 24 hours of asking for help.
6. Advantage If You Are Maxed Out
You are where you are as a result of your beliefs about money which translate into your money habits. Sadly, much of our society programs us to be poor.Therefore, one of our goals in RESULTS is to help you acquire money habits that will allow you to create and retain large sums of money. Therefore, one of the first things we teach is how to get out of debt. This is what Tim talks about on the video which you can watch at https://www.propertyinvesting.com/results2008prereg2
To date, everyone I am aware of exited the program in a superior financial position than when they started.
7. Cost Free Introduction
If you would like to discuss your specific situation then call Simon Buckingham on 03 8892 3800 during office hours. He is the head coach and will be able to help you.
8. Allocation of Mentors
Shortly after joining we ask you to complete a survey and then based on your answers we will allocate you a mentor that best suits your needs. If there is a personality clash or other complication then we can reallocate you to another mentor.
Remember, even though you will be under the primary care of one mentor, the whole coaching team will be available to assist where needs be.
9. My Role
Most of my time in mentoring is spent either with the coaches discussing issues or else working with RESULTS graduates. That said, if you ever have a specific need to talk to me then I'm available.
I hope this has helped answer some of your questions. RESULTS really is a unique opportunity for those who want some hands-on help from people who have walked the path and know the way to use property to make money.
All the best,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi L,
The first four weeks are self-study rather than facilitated.
In terms of feedback… I recently put a video together which may be of interested. You can watch it for free at:
https://www.propertyinvesting.com/results2008prereg2
Cheers,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
