I have a home which I plan to vacate & rent out. However, there is no mortgage on the property – thus there is no interest to tax deduct and I would pay a lot of tax on rental income.
So I am planning to :
· Sell my home to my Trust (as it is a great location & very rentable).· The Trust would need to borrow the mortgage (I expect I would need to be guarantor or else I would need to borrow the mortgage myself + lend the money to the Trust). The interest would now be tax deductible as I am the main unit holder.
a) Are there any issues that I should be aware of?
b) Assuming I go ahead, should I sell the home to the Trust
– at the lowest price possible and pay as little Stamp Duty as possible ?
– Or, should I sell it as high a price as possible as there will be no CGT liability. (I understand my borrowing power would also be a factor).hi cia
i did the same thing last year and was advised to get the property valued as high as possible,because in the long run it will lessen the cgt.
unfortunately the stamp duty increased but i was advised it was the lessor of the two evilssteve
Hi there cia
Just curious as to your main driver to sell it to a trust. I understand the many benefits you can get from a trust structure as have that structure myself as plan one day to move IP’s to an SMSF should super tax concessions remain as they are now.
I had started our buying IP’s in my name and now moving to buying within a trust strructure for that main reason. At my age (mid 30’s) , I did not see much of a benefit on incuring stamp duty to sell to the the trust at this point in time.
My understanding is you are still going to have to distribute that income somewhere as it cannot sit within trust. You may be able to minimise it via a company or other beneficaries.
Anyway, be interested to understand you overall strategy and ideas
Cheers
SimonOriginally posted by Simon C:Hi there cia
Just curious as to your main driver to sell it to a trust. I understand the many benefits you can get from a trust structure as have that structure myself as plan one day to move IP’s to an SMSF should super tax concessions remain as they are now.
I had started our buying IP’s in my name and now moving to buying within a trust strructure for that main reason. At my age (mid 30’s) , I did not see much of a benefit on incuring stamp duty to sell to the the trust at this point in time.
My understanding is you are still going to have to distribute that income somewhere as it cannot sit within trust. You may be able to minimise it via a company or other beneficaries.
Anyway, be interested to understand you overall strategy and ideas
Cheers
SimonHi Simon
I have paid off the mortgage on the house so I have no interest repayments so I will be paying almost 50% ncome tax on the the rent received.
Cheers
CiaSounds like a great idea Cia. The trust structure has many advantages, including Asset Protection and Tax Minimisation.
What sort of trust are you thinking off?
If the property becomes -ve grared inside the trust the losses will be stuck in the trust untill the trust becomes +ve.
CATA
Asset Protection Specialist
[email protected]HI Cata
It is a hybrid trust. From what I understand if I am the main unit holder, then I can write the losses off agaist my personal tax.Cheers
CiaThat is correct Cia.
It may get a bit tricky, you borrowing money to buy units in a hybrid to but a house off yourself. I am not a loans broker but you should be able to do it. Terryw would be able to help here.
Then you will have cash to play with after the sale. I hope you have plans for it.
CATA
Asset Protection Specialist
[email protected]Hi
With a hybrid, the unit holder borrows money from the bank to buy the units (not the house), the trust lets the property be used as security. Then the unit holder can claim the interest on the loan against their other incomes. Losses still cannot be distributed from the trust, but because there is no loan, there will hopefully be no loss.
If there is no CGT, then I would suggest you try and get the value up as high as possible. This will help you borrow more, as well as reduce CGT if you were to ever sell.
Terryw
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Parramatta
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Hello Cia
Do you have plans for the money that you will get paid for the house. I mean are you planning to use it for more investing?. If so, why can’t you just keep the house in your name and get a mortgage on it which you use for investing.
This will then be tax deductible and you can buy your next IP in a trust. All that wasted money on stamp duty seems such a pity. [glum]
Of cause if you are planning to use the money to buy yourself another PPOR, then that doesn’t work.
Just a thought [smiling]
Elka
Originally posted by Terryw:Hi
With a hybrid, the unit holder borrows money from the bank to buy the units (not the house), the trust lets the property be used as security. Then the unit holder can claim the interest on the loan against their other incomes. Losses still cannot be distributed from the trust, but because there is no loan, there will hopefully be no loss.
If there is no CGT, then I would suggest you try and get the value up as high as possible. This will help you borrow more, as well as reduce CGT if you were to ever sell.
Terryw
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Parramatta
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Just send me a blank email, with “subscribe†in subject line.Hi Terry,
Thanks for your reply. Is the following example correct ?
The Trust will buy the house for 700k (for example) & I will lend the Trust 700k to buy the house(which I will borrow from the bank).
The bank loan interest will be 50k p.a. The rental income, which the Trust will distribute to me, will be 30k p.a.
I can write off the difference (50k-20k) to my tax at my marginal tax rate.
Is this example correct ?
Cheers
ciaOriginally posted by elkam:Hello Cia
Hi Elka, See inlines, Cia
Do you have plans for the money that you will get paid for the house. I mean are you planning to use it for more investing?. If so, why can’t you just keep the house in your name and get a mortgage on it which you use for investing.
Cia ==> I want to put the property in a Trust because I will pay 15,00 tax a year on the rental income as I have no mortgage on the property & thus no interest payment to deduct. Plus I don’t want to live in it any more
This will then be tax deductible and you can buy your next IP in a trust. All that wasted money on stamp duty seems such a pity. [glum]
Of cause if you are planning to use the money to buy yourself another PPOR, then that doesn’t work.
Cia ==> I plan to buy another PPOR
Just a thought [smiling]
Elka
[/quote]
The Trust will buy the house for 700k (for example) & I will lend the Trust 700k to buy the house(which I will borrow from the bank).The bank loan interest will be 50k p.a. The rental income, which the Trust will distribute to me, will be 30k p.a.
I can write off the difference (50k-20k) to my tax at my marginal tax rate.
Is this example correct ?
Cheers
cia
[/quote]No qiute Cia
You borrow the $700k and buy special income units from the hybrid discretionary trust. The lncome from the house (the profits from the trust) then go back to the unit holder (you).
As you have made a personal loss, the loss is then tax deductable against your personal income.
Hope this helps
CATA
Asset Protection Specialist
[email protected]I think CATA has it correct.
Terryw
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CIA,
It sounds like you are planning to rent out a home that was your principal place of residence.
The house is in your name only.
Also, you are thinking of “selling” the home to a trust that you will establish.
Am I right so far? I will keep going on the assumption that I am.
Finally, the reason you present for selling to the trust is to reduce your tax liability from the rental income by offsetting interest income against it.
Still correct so far?
Here are the issues you will encounter with your plan:
– stamp duty on the transfer to the trust UNLESS there is no change of beneficial ownership. IE: if you are the sole beneficiary of the trust. However, if you are the sole beneficiary and also the trustee (even via a company where you are sole shareholder) there is no trust. Check with your lawyer but I think you will find you will trigger a stamp duty event in order to be able to establish a trust.
– you don’t state what you are going to do with the money you borrow in order to create an interest deduction to offset the income. If you DO NOT use that money for investment purposes then the ATO will disallow the interest deduction regardless of which entity (you or the trust) incurs the interest expense. Kinda defeats the purpose of what you are trying to do.
– the property being your principal place of residence is CGT exempt. Transferring to the trust will make it eligible for CGT and getting the highest possible valuation really only fiddles at the margins.I would strongly recommend you get a good accountant and have a rethink about your motivations and purpose for doing this. It sounds like you are making a decision to avoid tax. This is not the best reason for messing about with trusts, etc, particularly if you may have your deductions disallowed anyway.
The usual and best reason for trusts is for asset protection. Moving assets about as you propose is usually only done to protect the property against some future ill-event.
Another alternative to moving the property to a trust for asset protection is to mortgage it to the hilt and invest the loan funds in another property that you do buy in a trust. Your property outside the trust will have the bank standing first in line in case some shark lawyer wants to try and attack it. This is a classic case of where debt is your friend.
Karl
–
That is a great response from Karl.
I was thinking about doing exactly the same thing as you. However on rethinking it through I have decided that I have public liability insurance which should cover any problems encountered in the IP in terms of protecting me. So am leaving it in my own name. But in future would consider using a Trust for Asset Protection if I had lots of lots of assets.Its a costly exercise to do things the way you are thinking. Asset Protection is the main reason for using a Trust (a complicated one at that – using a Unit Trust), and not for making adjustments to the tax on your personal income.
Also – did you think about taking out a mortgage on the property to invest the funds in another IP – and claim the interest on your tax
for both properties
JulesJULES1
Email MeHi Jules1
A unit trust has very limited asset protection and is not something I would use. For example, if I have a unit trust (which I don’t for those who are intrested) that has two units issued, and a total net worth of $1mill inside the trust.How much is each unit worth?
$500k if you asked me and fairly easy to establish.The problem with waiting untill you have lots and lots of assets untill you look into asset protection is the longer you leave it, the more expensive it becomes. It can be cheaper to structure it the best way for you in the begining, rather than restructuring later.
Public liability insurance is an important partof asset protection,but it is just a part. From my expirence, some insurance companies are claming negligance on the land lord’s part. this means that you would not only have to fight someone sueing you in court, but also the insurance company to pay if you loose, possibly going bankrupt yourself in the process. And it is possibly more common than you think.
Everyone has different situations and should be aware of the potential risks, therefore being able to make an informed decision about how to structure assets.
CATA
Asset Protection Specialist
[email protected]Cata
Hopefully Jules was considering a unit trust with the units owned by a discretionary trust. This used to be popular in NSW before the Land Tax rules (or interpretations of the rules) changed.
But it still may be a good structure as it may be possible to transfer you property into your SMSF later on without stamp duty.
Terryw
Discover Home Loans
Parramatta
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Hi Terry
Some tell me that certain HDT’s can do the same as the unit/discretionary trust structure, depending on the deed of course.
CATA
Asset Protection Specialist
[email protected]
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