Hi,
I am looking at expanding my property portfolio and adding a commercial property. Currently I have two residential properties in my own name as follows:
Property 1: Value-$550,000 Debt-$250,000
Property 2: Value-$700,000 Debt-$90,000
What I was wanting to do was set up a trust, withdraw $550,000 of the equity from the 2 properties, buy a commercial property outright with the $550,000 in the trust. Therefore receiving the lower interest rates overall and a higher yield. The bank has confirmed that they will support this structure.
My question relates to the tax implications if I do this, raising the debt on property 1 and 2 am I still able to claim the interest deductions? I am getting mixed messages on this and the impact on whether the trust is worthwhile.
Any answers to this or suggestions on structure would be most appreciated.
Ben
Hi Ben, I would suggest you not do that. It is far easier to get a loan for a purchase than to access equity at a later date. You can always set up LOC's against the existing properties and pay the commercial loan down to $0 post settlement, there are plenty of loan options with free redraw. Commercial rates are not always more expensive anyway, you can get 4.99% for one year at the moment through one lender.
i wouldn't want o comment specifically on tax deductibility on a forum without knowing the specifics of the situation, but generally if the purpose of the debt is to purchase an investment then there shouldn't be a problem.
I'm in the same boat as Ben. I've never thought about structuring it this way but if there are no tax implications sounds like a great structure.
Waiting on the big boys to comment….
Thanks for the feedback Alistair, the further question I have is that if I purchase the additional property in a trust, the property will only be positively geared in the trust if I am able to access equity and put it in the trust. However if the debt is in the trust I will not be able to access the negative gearing benefits.
This then makes me question whether a trust is the right structure or if I should continue purchasing the properties in my own name.
Further it is my understanding that I can not transfer the existing properties into the trust without incurring stamp duty and capital gains tax.
Not sure if I am on the right track here, please correct me if I am not.
Regards
Ben
You cannot claim any interest on money borrowed and gifted to a discretionary trust. If you loan the money to the trust you can claim the interest but not if you charge the trust less interest than you receive.
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
Why is this so?
Because with a discretionary trust there is no guarantee that any beneficiary will receive an income from the trust. This is the case even if the beneficiary is the one that controls the trust. Therefore any borrowings to be ‘invested’ into the trust would be done with the possibility of not getting any return and this would not be a commercial transaction.
Using a unit could could enable the borrowings to be deductible. If the borrower borrows to buy units in the trust and they have fixed entitlements to the income and capital of the trust then the interest would generally be deductible. They are borrowing to buy income producing units.
If the trust is a fixed unit trust then it may be possible to access the land tax free thresholds too.
Furthermore using a trust may enable the units to be transferred to a SMSF down the track too – possibly without stamp duty. Imagine having your property owned by a SMSF where in retirement there is no income tax and no CGT.
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
No problem Ben, There are quite a few things you need to consider. You tax position now is important, but also in the future. At the moment yields are relatively high compared to the cost of finance, so probably your property will be positively geared even if you max out the borrowing. As Terry mentioned you can access -ve gearing benefits by using a unit trust if this is not the case, but this does not have the flexibility of a discretionary trust and may be less tax effective in the future. If tax is a big issue for you, you should also consider the type of property you buy, newer commercial properties often have very attractive depreciation benefits for example.
You might also want to consider that if you buy on lower LVR you can potentially borrow without giving a guarantee.
I would be very reluctant to buy a commercial property in a personal name. There is a much greater chance of litigation for starters. Also tax inflexibility. I would suggest a unit trust with possibly a discretionary trust owning the units.
I agree with Alistair about getting finance now too. And that is a good idea about borrowing as much as you can now and then once you settle you could borrow funds at a cheaper rate on the residential and then pay down the commercial loan by on lending to the trust.
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
Not much to say now as Terry has very adequately set out the position over his 3 responses.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thank you very much for your response and advice Terry. A further question would you change the setup if it was a residential rather than commercial?
[email protected] wrote:Thank you very much for your response and advice Terry. A further question would you change the setup if it was a residential rather than commercial?Could you repeat the question please? (only joking!)
Generally not, but if the property is in Victoria or if there was a possibility that the property could be lived in at some stage in the future then maybe.
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.
Pressed save to many times, as you can see.
Agreed. Terry is all over it. Great contributor to forums
RPI | Certus Legal Group / PRO Town Planners
http://www.certuslegal.com.au
Email Me | Phone MeProperty Lawyer & Town Planner
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