My parents have been living in their home for 10 years and have $30K left on the loan and the property is valued at $250K. They are considering building which will cost $250K. What they are looking at doing is renting their current place and living in the new property. What is the best way to restructure the loan/situation to be of a taxable benefit? and generate extra income. They have been told by a friend that they cannot use their current property as an investment because it has been privately occupied by them? Also when they sell their current property in the future how does the tax man calculate the tax payable on the profit made by the sale, ie is the calculation based the current market value or the $90K they paid for it.
Jason,
The friend is wrong. Any property can be used as an IP. Unfortunately your parents structure will not be tax effective.
They need to see an accountant. One idea might be to sell the property to a trust for a good price, pay the stamp duty and exercise the CGT exemption – no tax is paid on any profit.
Borrow 100% plus costs and use the proceeds to build their new home.
This will result in a loan against the IP and a minimal loan (if any) against the new PPOR.
Hope this helps,
Simon Macks
Mortgage Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Jason
There is nothing to stop your parents renting their home and treating the property as an IP. Just bear in mind when they only have a loan of $30K the amount of interest deductions will be limited.
Certainly they make obtain some building write off or depreciation depending on age but I guess they have to way all that up against the potential CGT they will pay if the ever sell it (calculated on the value when they moved out).
The other thing they have to consider is the interest costs they incur for the new construction are not tax deductible as it is a PPOR.
May want to consider selling the property using the cash to pay for the building and then use the equity to invest in +cash flow properties.
Cheers Richard
[email protected]
http://www.fhog.com.auThere is no such thing as a problem.
Just a solution waiting to be foundRichard Taylor | Australia's leading private lender
Sorry the 2 previous posts seem to contradict each other. Is there a way they can build, and end up having their current home their IP with a $250K loan on it and minimal on their new PPOR. Hence taxable interest on the IP loan.
They would like to keep the property as it has alot going for it eg position etc. But it will not be worth it if they own it and have a $250K morgage on their PPOR. Idealy they would like to have the loan on the PI.PS. great Forum, keep up the great work. Is an excelent resource for us newbies..
Jason,
They are very similar advice.
We both suggested they sell the property to shift the equity to the new property.
Richard suggested buying different properties whereas I described a way to retain the existing property.
The course they choose will be up to them. If they want to keep the property then my idea would be worth exploring with an accountant.
Good luck,
Simon Macks
Mortgage Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Jason
I like MH’s idea.
There is no way for them to simply increase their loan on their current property and for it to be taxable. If they simply get a loan on their new property they will be paying the mortgage with after tax dollars, not dedcutions. But they will be paying even more tax as their old property will be making a nice profit.
If they sold to a trust, they get to keep the property but can get a loan for the trust to purchase it. The funds received will be tax free (CGT exempt) and they can be used for the new home purchase. All they will be up for is:
Trust formation-$1000
Stamp duty – $7200 (approx in NSW)
legals-$500 approx
and a few more various small feesmaybe $9000 all up.
The trust would rent the house out and claim interest on the full loan (maybe 95% LVR), overall it may be slightly negatively geared. At the same time the $220,000 from the sale of the house to the trust could be used for building and they may need a small loan of $30,000. the interest on this would be minimal.Now say they rented out as is:
rent $250 per week = $13,000 per year. less say $1000 in deductions = $12,000 profit. say they paid an average of 30% tax, that would be $4000 per year in extra tax. At the same time, they would have a mortgage of $250,000 on their new home. the interest on this would be about $15,000 in yr 1, and they couldn’t claim it!Does this make sense?
And beware of taking advice from ‘friends’. It can cost you dearly. get some good advice from a GOOD accountant.
Terryw
Discover Home Loans
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
Jason you could always do a deal with your folks and buy it from them. Don’t know if you have any properties, but it could be a good start for you.
Cheers
Mel
You must be logged in to reply to this topic. If you don't have an account, you can register here.
