I have a tax question that I was hoping to get some general advise on and possibly links to back it up, probably one for the professionals like Terry or Richard.
I have had my investment property for a number of years and it has always been in my name, and so have the loans. We have recently sold our old PPOR and are buying a new one due to settle soon, all I have to do is return the loan documents, however to get this loan without paying LMI (complicated reasons why it is around 90% LVR for the moment, but it is), I have cross collateralised my investment property (which is not of concern to me). The issue is that the bank has issued the loan documents for BOTH loans in both our names, even though they should have issued the investment loan in my name alone and it is too late to change it to avoid possible settlement delays.
My questions are:
1. If the investment loans are in both names, does this have any tax complications of claiming the full amount against my taxable income being the property is only in my name still.
2. Can I refinance the loan later back into my name (say in the weeks after settlement) without tax implications.
3. If all is good so far, if I have the loan fully in my name again, can I later transfer 50% of the property to my spouse (NSW stamp duty applicable) as tenants in common and still claim the full amount of the loan against my half (the loan would be less than the value of my 50%).Extra Question:
4. If I transfer 50% of the property to my spouse without a PPOR exemption, is there any CGT event/liability at this time on me, or does the CG liability for the 50% transfer to my spouse for when sell in the future?Thanks heaps,
John
Tax is determined by the name on the titles, not the loans so having your partner on there shouldn’t cause issues. As always though, speak to your accountant. :)
Cross collateralisation is always the work of the devil, so even though it may not seem like a problem – it never is until it is a problem. Well worth seeing about fixing that up when you have a chance.
I’ll leave the rest to the accountants to answer.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Cross collateraisation is often used on a PPOR loan at 50% LVR to finance an investment at 95% and to be honest is sheer stupidity, and you almost deserve to lose your house if you gamble it on an investment, though there may be other purposes that are not for investments.
Doing it the other way make good sense in my option and I am offering up my investment (46% LVR) to secure my PPOR at a higher LVR (90%) whilst avoiding LMI. Without cross collaterisation if I was to default on my PPOR the bank couldn’t just take my investment property but it wouldn’t be hard for them to get access to it via a court order if need be. Plus I will soon enough be in the position to pay off my PPOR and tell them to get stuffed if they try anything, at which time if I did, I would decouple the arrangement.
I have done it twice now with success and save tens of thousands doing so, and I only ever keep the arrangement that way, whilst the investment helps my PPOR, not the other way around, once it has served its purpose it will move on, but not until my mortgage is below 80%.
You can still setup the PPOR purchase such as that, without requiring cross collateralisation at all. It’s a common mistake/misinformation provided by the lender that the security would need to be crossed.
For the same benefit, you could just secure 80% of the value to the PPOR and the residual solely to the investment property. Still no LMI, but not crossed from day 1.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
I am not an accountant, but here are my answers
1. maybe. I would suggest you avoid joint loans completely.
2. not so clear cut because you would be borrowing to pay out a spouse’s share of the loan and she didn’t use her loan to purchase an income producing asset.
3. depends how you transfer. Assuming your loan was deductible to yourself in full and assuming sell your 50% to your spouse, you would only be able to claim half of the interest. You cannot claim the other half as it relates to a part you no longer own. However if your spouse borrows to buy your 50% she may be able to claim the interest on this loan. If you transfer without consideration then she will not be able to claim any interest.4. Yes. Transfer is a CGT event.
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
Seems like a complex question only a good tax accountant who really knows the ropes can answer :(
Thanks for the help anyway.
So to clarify on the CGT, if I transferred 50% to her I would cope a CGT event, and then if we sold it in say 12 months time and it went down, she would get a capital loss??? Not exactly a great outcome, though in the current climate it could happen and would be my worst case scenario.
It’s a common mistake/misinformation provided by the lender that the security would need to be crossed.
Obviously something the banks don’t want us to know, and to be honest I don’t think many of them would even know how to structure it, as they initially wanted me to pay off an investment loan to get this new mortgage, and it took some effort to get what I wanted… I guess if the bankers you were dealing with were smart enough to know complex investment lending and tax benefits, they would probably own a bank rather than work for one. (Having a really bad experience with NAB at the moment and I will never use them again after this, it’s not the first time I have run into mistakes and troubles that cause delays that have almost delayed settlement, with home lending either).
Seems like a complex question only a good tax accountant who really knows the ropes can answer :(
Thanks for the help anyway.
So to clarify on the CGT, if I transferred 50% to her I would cope a CGT event, and then if we sold it in say 12 months time and it went down, she would get a capital loss??? Not exactly a great outcome, though in the current climate it could happen and would be my worst case scenario.A tax agent or lawyer would be the person to get this advice from.
If you sold 50% to her and she later sold this 50% for less than the cost base there would be a capital loss.
What are you trying to achieve with setting things up like this and planning to change mid stream? Or have you already settled on the property?
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
If the INVESTMENT loan is in both names, but you solely own the property & then the total interest on the investment loan will be tax deductible providing the value of the loan on the finance restructure has not increased. example:
Prior to restructure: Investment Loan Value = $100,000
After restructure: Investment Loan Value – $150,000
Only 2/3 of the interest on the new loan would be tax deductible, as the additional $50,000 borrowed, was borrowed for the new house purchase not the investment property.A CGT event would occur if you transferred 50% to your partner (seems silly in theory to do this, as you’re paying stamp duty on the transfer as well).
I do have an accounting background but – the above is general information only. You should speak to a trusted advisor (accountant) who is aware of your individual position and not rely on information provided on forums as being true & correct.
The property I have had for a number of years (14) and I am refinancing for the equity as collateral, the loan is not changing its just moving to the same bank as our PPOR that we are about to purchase, so that the higher LVR on that loan can occur without LMI.
I was exploring the CGT stuff, as if I were not liable for CGT on the transfer to my wife, then putting the property in both names is for sentimental reasons (and for satisfying the ATO its not JUST about tax), then if she were to pay the CGT in the future the difference would be a lot less the the stamp duty cost difference anyway. However if I have to pay CGT at my rate now vs her rate later, the transfer would not be worthwhile. My assumption was that the CGT event would only occur on a monetary sale, not a sentimental transfer of ownership (even though stamping tax still applies – death and taxes, I don’t know why I didn’t assume it before).
At least I have explored the option before acting, what prompted this thought about when the CGT event occurs was a recent article I read about shares where a guy transferred some part of his shares to his wife for a small tax saving, and then the ATO pursued him for CGT which he was not aware he needed to pay on the transfer as no money changed hands, meaning he made a horror mistake and ended up well out of pocket than if he had held then himself.
Yes CGT would be assessed at market value.
What state is the property located in?
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
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