I would like to receive some advice. My wife and I own an investment property which we are currently renovating with a view to move into to become the family home. We expect to have a mortgage of around $600K with the renovation work (currently the house is valued at $720K w/out renovations more with the reno).
We plan to turn our current PPOR into an investment property (currently in joint names and worth $650K). We own $55K on this currently.Is it possible to “buy” my wife’s 50% share of our current PPOR?I understand that I will have to pay stamp duty and other fees but the cash the bank will provide (say $325K) can be put towards the larger mortgage on what will become our home therefore reducing the bad debt. This will also allow us to claim deductions on the IP.
1/. Can this be done and what are the pitfalls that I need to consider?
2/. Are there any other similar options to structuring the situation with the same outcome i.e. principally to reduce the bad debt on what will become our home and allow some negative gearing on the new IP?Thanks for any advice.
Yes, you can do this but will require a ruling from the ATO. Your reasoning behind the change of name would have to be good, such as an in-house argument b/w you and wife on whether you keep the property of not.
I had a similar situation for myself, three years ago. When I looked at all the pros and cons it stacked in favour of selling the PPOR to release the funds and pay down the new PPOR debt. I was than able to have a large pool of cash to make very good acquisitions. Not saying this is you. but the numbers should be done carefully to see if there really is a difference in selling or keeping the property. You have many other personal details that bare not disclosed on this forum that also my have a direct bearing on what you should do….
Another potential option is to sell to a discretionary trust – but there are many disadvantages to this too.
A 3rd option is to speak to a tax advisor about setting up a LOC and borrowing to pay interest on the old PPOR – this is ineffect capitalising the interest on the loan and will free up more cash to pay down your new PPOR faster.
Which state is your house in? If VIC stamp duty may be exempt on the transfer from both to 1 names.
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
Terryw wrote:Another potential option is to sell to a discretionary trust – but there are many disadvantages to this too.A 3rd option is to speak to a tax advisor about setting up a LOC and borrowing to pay interest on the old PPOR – this is ineffect capitalising the interest on the loan and will free up more cash to pay down your new PPOR faster.
Which state is your house in? If VIC stamp duty may be exempt on the transfer from both to 1 names.
The properties are in Sydney – so I anticpate to pay stamp duty. I do not necessarily want to sell my current PPOR if I can avoid it to free funds to pay down the higher mortgage. If I do as I suggest above am I open to the ATO scrutiny?
Would the issue be with the funds I receive from my wife if I bought her share out (same the $325K)?
Or will it be her ability to claim on our PPOR when it becomes a IP – she works casually so she has the lower income between us?
I think you should be pretty safe from the ATO as long as you are not transferring names for tax reasons. good to get a ruling
No stamp duty exemptions in NSW for this sort of transfer either.
It may work out cheaper and less hassle to just sell the property and buy another. You need to weigh up the tax savings v the costs of selling and buying.
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
The main objective is to reduce the high mortgage on what will become our home. Saying that if the loan on our PPOR (to become IP) will also increase means she can claim more on tax anyway by default.
Would the ATO see this negatively even though it is not the overriding objective?
gcp, i am not sure. You would probably be ok, but the ATO has powers under part IVA of the tax act (ITAA 1936, s77 onwards) to disallow deductions if it was a scheme to avoid tax. So you should legal advice before doing 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
Thanks Terry. Do you mean legal or accounting advise?
Really it is legal advice, but accountants can advise on legal issues in relation to taxation. If you get written advice then you should be safe.
It might be cheaper if you just lodge a request for a private ruling – or just do it yourself.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
Thanks Terry. Sound like the issue may be the intention of the use of the funds freed this way – it would have to be for income producing purposes.
Another question. Would a family trust be a better option? Not sure how complex this is to set up and how the ATO would view this as per my original post?
There is no accountant in the country that will give you this advice on the terms you are suggesting, you will need a private ruling in regards to the first instance.
In regards to the Trust option, you will find some creative accountants that will allow you to do this, that being said it is still not concrete on whether the ATO will allow.
What you are asking cannot be solved on this site or by your local accountant. You have two options: to speak to a creative accountant at a premium price (that may come undone in several years when the ATO cracks down on that particular scheme) or get a private ruling- this is the real option even if you go for the creative option.
If there is a way outside this, it it has part IVA of the tax act (ITAA 1936, s77) all over it……..
Thanks No. 8. If it problematci (and it sounds like it is) then I would not go down this path.
gcp wrote:Thanks Terry. Sound like the issue may be the intention of the use of the funds freed this way – it would have to be for income producing purposes.Another question. Would a family trust be a better option? Not sure how complex this is to set up and how the ATO would view this as per my original post?
Its not so much intention of the use of funds, but if it is being done solely to avoid tax. I think you could have a strong argument that it is for other reasons such as estate planning, freeing up funds for further investing etc.
A trust can be set up easily enough, but this will involved a whole new set of issues such as:
– losses trapped in the trust
– land tax etcTerryw | 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
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