Hi,
My husband and I are in a slightly unusual situation: The rental crisis in Sydney has meant that it was easier for us to buy a house than it was to rent (with a little help from my father, who will hold the mortgage for us for the next five years until we have consolidated our own financial situation a bit more). There was little difference between the rents we were having to look at paying and buying a house the right size in a less-desirable area, so we decided to take the plunge.
I've provided the closing costs from a savings fund started by my grandma when I was little (it was always to be a deposit on my first house), and Dad is paying 5% deposit, which we will pay back later when we buy out the property in five years. The idea is that it costs my father as little as possible (preferably nothing, or even better, gives him a little extra income or a tax break in the meantime).
This means that we miss out on the first homeowners grant for the moment, because we are not on the mortgage ourselves until we buy out the property, but it's basically ours, and we have five years to add value by doing it up (lots of potential there, believe me!). And it looks like we would be eligible for FHOG in five years anyway.
My biggest concern is the CGT Dad might have to pay at the end of the arrangement.
Of couse, we would try to compensate him for any CGT he had to pay, but it's occurred to me that this is very similar to a Vendor Finance or a Lease Option arrangement, in that we have to pay all the rates, maintenance and are allowed to improve the property over the five years during which we are "tenants".
So the big question is this: would it be cheaper for us to be on a proper vendor finance contract or lease option with my father straight away? I understand that even if Dad sells us the house in five years for the same amount as we paid today (minus whatever little we have paid down beyond interest by then!), he will have to pay CGT on the value as it stands in 5 years' time, complete with all the improvements that WE have made. BUT, what is we have a contract NOW which says we will pay him a certain amount in five years' time when we have paid the amount down a little? Does this make the Capital Gain all OURS (not Dads) from the start, and therefore cost him less?
And finally (sorry this is so long), where can I find a good contract to use for an arrangement like this?
Thanks in advance for all your help!
I think you may be able to structure it so little tax is paid. You will need some good advice.
But why buy it in your dad's name anyway? You will just be wasting stamp duty and delaying the FHOG for 5 years is risky – who knows if it will be still around. Getting it now in your name will allow save on CGT for your dad and give you the future growth tax free.
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
AS I understand the CGT he would only pay if he sells the house to you for a profit on what he bought it (a capital gain) If he sells it to you for the same price i don't believe there will be any CGT on the hand over. Just like if someone sells a house undervalued, he doesn't pay extra tax because the value in effect might be higher. Does this sound right to everyone else? I am not 100% on this, might be worth speaking to a tax agent.
You will be hit for two stamp dutys, but you may have to cop this if this is the only way you can service the loan? Is it not possible for your dad to go guarantor on the deal? You will be eligible for FHOG even if this is the case. Best to check with a broker first though!
Hi Terry,
Afraid it was a case of getting a leg into the market any way we could: and that meant the safest thing to do was have the house in Dad's name. Our credit is very poor right now. Not hopeless, but we owe too much from starting our business to get another loan as well, even with Dad as guarantor.I would have preferred to get the FHOG now too, but at least now we have five years to improve the capital worth of the house. And the govt are talking about doubling it again, not axing it. I can't see that Labor would take it away if they got in either, but that's me digressing into politics!Also, Stu, I thought I read in Property investing (and heard from our broker) that he'd have to pay CGT on the whole market value as it stands in five years time, which is why it can get quite nasty for people wanting to sell property on the cheap to family.It occurred to me that a contract for the lower price on Vendor Finance at the start of the five years might be a way to get around it, as the property is, in a way, already sold again at the start, not at the end. Am I right?does dad still work?
Tax deductions for dad will play an important role.
You might consider NEW as there are great depreciation benefits.
Your 'buying' power is usually 50 to 70K better (new V old).
Will he still be working in 5 years?
This will affect CGT.
If this transfer is in a year where dads earnings are small, little CGT.
Just some thoughts.
PS tax office will consider fair market value not sales price on the transfer
Yes, Dad still works, but in five years, he's hoping to be retired (being 61 this week)
We are already aware of the negative gearing possibilities of the house, so this does help a little. Good to know that CGT is less with income! Thanks!So I was right about the fair market value, not sale price? Do I need to ask the Tax Office about this "agreed market price in 2007 vs 2012"?We have a self assesment tax system.
You put the figures in in 2012 just be mindful that discrepencies can create audits.
There will be fair market value guides (latest sales, RP Data etc) at the time of transfer.
CGT is linked to marginal tax rate in the year of sale.
2012 might be a very reduced marginal tax year for dad.
Could work out fine.
If you pay 'interest'on the vendor finance in 2012 be aware of pension / income means test issues (assuming dad goes on pension)
There shouldn't be an income test issue as Dad is self-funded… Thanks, this has been such a help!
The other thing I forgot to mention was that we can't really buy new and get a big enough house. Our home business takes up too much space, so the 1956 fibro that we can do up and add on to is a much better option than a 3 bedroom townhouse which we could get new for the same price. And then there's also the option to knock down and rebuild if we decide that that's a better way to go down the track. It's not a huge block, but there is potential there to at least build a duplex and maybe even three or four two storey townhouses like the ones next door.Hi Elizabeth,
I have done a few wraps in Vic, I'm not an accountant but I'm happy to share my thoughts.
If you signed a wrap contract with your father it is most likely he would not pay CGT on the property. However, he would most likely pay income tax on the profits. If you wrote the contract so that there was no profit (ie you are simply covering costs), then you may be able to avoid this income tax also. I believe in NSW you would be eligible to receive the FHOG and/or avoid stamp duty as a first home buyer providing the price is under $500,000. (Check this with the OSR).
With a wrap your father would not be able to claim any expenses against his income as he would with a normal investment property, but as you would be meeting all the outgoings this would be of no real disadvantage to him.
An alternative would be to use a Lease Option contract. This would allow him to claim income tax losses, but as I mentioned these should be nil, as you will be paying all the expenses. If it is a lease option he may be liable for land tax, depending on what other property he owns. (Land tax would not apply if it was a wrap).
A lease option would have the added complictaion of the OSR charging stamp duty on the market value of the house when it is transfered to your name (ie in 5 years). This would most likely mean you pay more in stamp duty, possibly double!
So it is really six one way and half a dozen the other. I would suggest a wrap might work better. Just write it up so that the price you are buying it for is the same as the price he paid.
Definately get legal advice though. Like I said these are just my thoughts.
Hope it helps,
Greg
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