My wife are I are looking at buying a beachside block of land with the view to building a holiday home. The intended use will be a mixture of renting it out and us staying in it.
We have a family trust with a corporate trustee and a corporate beneficiary already set up and we have 2 kids under 3 years.
We are likely to buy via the family trust. That way the future capital gain can be shared amongst all 4 of us once the kids are 18 and god willing we are retired.
Im confused on how best to finance this though.
If we pay for the land ourselves (rather than the trust borrowing from a bank) then do we have a permanent loan between us and the trust? Does this have to sit there until the holiday house is built and starts getting rented out?
Presumably we would have to charge the family trust interest which would be assessable income at our marginal rates? But the trust couldnt claim a current year deduction for interest (as well as land tax etc) because it only holds land and not an income producing asset.
How could we utilise the interest expense in the trust? Does it have to be a capital gain that we offset against?
Maybe we could buy some shares that make capital gains (if such a thing exists in this day and age) and put them in the family trust to use up the interest and land tax deduction?
Also, if we borrow from an external bank as individuals and onlend this to the family trust. Can we claim the interest? I would have thought so.
Am I barking up the wrong tree with any of this?
There are a few issues you need to consider,
– Possible more in land tax (eg NSW)
– You will need to either gift or lend money to the trust to use as the deposit and for ongoing funding
– If you gift you cannot claim the interest on the money you borrowed.
– If you lend to a trust you can claim the interest you pay as a deduction, but this will be cancelled out by the interest the trust pays you (ie income), with the net result being the trust claiming the expense – which doesn't help if your trust has no income.
– losses of the trust cannot be used to offset personal income, your trust will need to carry forward the losses until there is income to offset them.If you just want to buy the land first for the trust it is probably best for you to onlend some money to the trust by setting up a loan agreement.
If it is a bit confusing just think of the trust as a separate person X. If X wanted to buy some land and didn't have any cash what are his options – you could gift him money to buy the land or lend him the money etc etc. I think this makes it a bit easier to understand.
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
I was hoping you'd be the man to reply Terry. I've read your advice in other similar posts but couldn't quite find the precise answer on some of my queries.
Good to know that we can claim interest on the borrowings that we will then onlend to the trust.
Yes I thought I would get a loan document put in place as you advise. Its seems best to do the loan rather than the gift because at least you have the interest losses building up in the trust even if you can't use them immediately.
I"m pretty sure that we could use the trust to buy a few shares whose gains could be used to use up the interest expense.
My wife will be happy now that I'm finally decided on which way to go.
Thanks again.
dodga
Do you realize that you can claim the interest on borrowed my to lend to the trust, but you will need to declare the interest the trust pays you as income. They should cancel each other out so you will get no benefit. The trust will get the benefit of claiming the interest it pays you however.
Also note the asset protection implications of lending rather than gifting. Money lent by you remains your money and will be available to creditors if you go under.
Also note that there are complex tax issues with losses with trusts. You may need to make a family trust election which may limit the beneficiaries of the trust to close family members. So you need to get some advice on this.
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
You must be logged in to reply to this topic. If you don't have an account, you can register here.
