The son (partner and two babies) can't get a loan yet and renting is killing them. I can afford to buy an investment property. We're in Victoria.
The plan is for me to buy and for them to "rent" it from me (the bank requires a lease). They'll pay all the loan repayments (somewhat above market rental) plus the on-goings. The intention is for me not to be out of pocket over this.<!–break–>
Once they're more established I'll transfer the property to them, giving them full credit for all the payments – monetary and in kind.
What issues should we be considering?
*Income tax for me – if all the "rent" goes on the mortgage, does my tax go up?
*Capital gains later on – are there some good sites that advise on this?
*Having a written agreement about what we're doing – don't want family conflict over this.
*The sale price to them will be well below market price – are there any repercussions?
*How do we divvy up any increase (or decrease!) in the property's value by the time we transfer ownership?
I'd really appreciate opinions on this. Thanks in advance!
Many issues.
You can only claim rent at market rates, transfers are at market rates as are CGT and stamp duty calculations.
You could also buy it now in your name with you are his/her trustee. Later you could transfer it for nominal stamp duty, $20 maybe, and no CGT. This may, may not, cause problems with the loan though.
Also family law issues – what if you or he get divorced and spouses make claims etc.
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
Hi Rob and Sue,
Depends why the son can't get a loan just yet. Is there a possibility of going guarantor on the loanor doing a family pledge to help your son? That way you wouldn't have to worry to much re CGT and rental income etc. It would affect your servicability if you went to purchase another property but doesn't sound like that is a problem at the moment
Glen
also with the setup you have describes it sounds like a lease to own check out “wraps” where they can “rent” at a rate that covers your mortgage and can pay out the property value at any time. but this will not save you in stamp duty. the way to do that would be as described before where you buy it as trustee for a trust where your son is a beneficiary and then can transfer the property to him at a later date, cos effectively you are just holding it and managing it for him anyway.
few ways you can do it, just have to weight up, stamp duty issues, legal issues, tax issues with family etc.
Thanks for the contributions folks. A few thoughts…
Terry said:
"You can only claim rent at market rates, transfers are at market rates as are CGT and stamp duty calculations."Claim what? I'm a real newbie. Could you spell it our for me please?
If I transfer it to S & A in a few years, for the balance outstanding on the mortgage, will we be hit for duty on the market value rather than what they "owe" me? That rather diminishes the value of this arrangement.
"You could also buy it now in your name with you are his/her trustee."
I feel a visit to a lawyer coming on."Also family law issues – what if you or he get divorced and spouses make claims etc."
Don't think I dare think about this.Glen said:
"Is there a possibility of going guarantor on the loan or doing a family pledge to help your son?"
What's a family pledge? Have to say I prefer the security of owning the property myself. If it does all go belly up at some stage, I have the firmest control over my assets. Seems the worst for them is that they'd have been paying rent to me for the duration of the arrangement rather than to a stranger.Buying another property in a year or so is a real possibility – I have another son…..
Illuminati said:
"the setup you have describes it sounds like a lease to own. Check out "wraps" where they can "rent" at a rate that covers your mortgage and can pay out the property value at any time"
Very interesting. I've never heard of this. Any clues on where I can learn more?
As I said above, I feel a visit to a lawyer coming on.
Many thanks for your comments.
Robyn
You should definitely see a lawyer as there are many issues and large monies involved. If you disregard the stamp duty issue or CGT for example it could cost you many thousands of $$$.
What I mean is any transfer will be assessed at market rates not transfer amounts. So you can sell to your son for $1, but you may pay stamp duty and CGT based on the value which could be $500,000 or whatever. You can transfer at the loan amount, but will be asseseed on the value. Stamp duty could be around $20,000. So setting up a trust to avoid this may be wise.
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. I knew this wasn't going to be simple, but it just keeps getting worse. Anyway, I've got the appointment made with the lawyer and another with the accountant. We've also made an offer on a property, just to keep it interesting – I'm not sure if I want it accepted or not, with what I've learned in the last day or so!
Cheers, Rob
you may need the lawyers sooner rather than later. You’ll need to get you trust etc before you sign the sale agreement. Get your solicitor to go over it as well.
My suggestion would be to consider agreeing to sell the property to your son by entering a contract at the smae time as you buy it. This would eliminate CGT years down the track. Contract terms could cover it so that he pays all expenses in relation to the property including interest on your mortgage.
Good idea, but this may result in stamp duty being paid by the son sooner rather than later (depending on state). Another is to sell an option to the son.
However both options result in 2 lots of stamp duty. The bare trust only results in one – and no CGT issues either.
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
Sorry to be so niave but why cant they get a loan in their own names. Is it income, credit issues or some other reason.
Most can be overcome depending on the LVR.
If you have equity why dont you let them buy the property in their own name and you finance the deal on your property.
Alternatively you lend them 20% deposit plus sufficient to cover their costs.
They merely pay the loan you have taken out and everyone is happy.
Seems too complicated to me the way which has been suggested in your original post however as i say there maybe reasons you havent disclosed.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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