I was hoping that someone could give me their opinion on our strategy.
We have a PPoR fully paid off – value approx $650K.
We have just bought a new PPoR (mortgage of about $750K) but in between buying the new place and putting our current place on the market the Brisbane RE market has cooled somewhat. We had intended to buy an IP towards the end of this year but then I read some references on this site about turning the PPoR into an IP by selling into a Trust.
We are tossing around whether to set up a trust and sell the current PPoR into it and making it an IP.
What are the limitations on doing this?
Thanks
Hi Harry
It is a strategy we have used for literally dozens of clients however in saying all of this it is not for everyone.
In essence the property is sold into a Trust structure with the loan being taken for the full current market value.
Stamp duty is payable on the Transfer price however is added to the loan amount.As the total amount of the loan is used for interestmest purposes the entire loan interest becomes a tax deductible expense.
You can then use the funds raised to purchase a new PPOR and potentially have no non deductible debt (dependant on the purchase price of course)The downsides include the additional stamp duty as mentioned and the fact that your original PPOR will be liable for CGT if sold down the track.
If however you intend to stay in the new property for a few years you will recoup these expenses several times over and have the start of a nice property portfolio.
In saying all of this with the pu
Richard Taylor | Australia's leading private lender
When did you buy the PPOR? It it was before 1985(??) it may be CGT exempt.
Transferring to a trust will enable the trust to claim the interest, but it would probably be negatively geared and trusts cannot distribute losses so the trust will need other income to offset the loss or you would need to roll the losses forward to be offset by gains in future years.
Also, you may have to pay more land tax if you use a trust.
it is still worth looking at, but you need to bear these additional costs and problems in mind when deciding,
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
thank you very much for your comments.
the house was purchased post 1985 so sadly no CGT exemptions…we have been advised that a unit trust would be out best option as opposed to a discretionery trust. off to see the accountant next week.
thanks again for your comments.
cheers
harrycatHarry
Unit trusts offer no asset protection. The units are property which can be seized by creditors if the unit holder is sued. They also offer no tax savings as the profit of the trust must be distributed in accordance with % unit ownership. Therefore, some people have their units owned by a discretionary trust to get around these 2 issues.
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
hello terry
we are self employed with a family trust (via a company structure) which disperses income to us and family members which gives the asset protection required, also enables us to split income as necessary. if I understnad the way things work, we will borrow the full amount in our name to buy the units in the trust, the interst will be fully tax deductible against the income from the unit trust as well as other income from the family trust. I should be wiser about this next week.
cheers
harrycatHi Harry
But your units would still be at risk, and hence the property if you are ever sued.
Since you run a business through a discretionary trust you should not be too much in need to personally deducting interest on the property loan. You could form a new Discretionary trust and buy the property in this. There would be a loss and no tax saving, normally, but if you have another DT, it could distribute to this new trust first to offset the loan and then any income left could be distributed to family members.
This would result in the same tax savings and give you asset protection – but could result in more stamp duty depending on the state in which your properties are 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
Richard.
I am interested in doing something similar ie creating trust structure for my PPOR to become an IP. This would be my first investment!!
I am interested in the following comment……..
As the total amount of the loan is used for interestmest purposes the entire loan interest becomes a tax deductible expense.
Does this mean that the deductions could be used by me on my Personal Tax Return and if so does that mean that all other costs contribute to the negative gearing??
Mark
Does this mean that the deductions could be used by me on my Personal Tax Return and if so does that mean that all other costs contribute to the negative gearing??
Yes
Richard Taylor | Australia's leading private lender
mark58 wrote:Richard.
I am interested in doing something similar ie creating trust structure for my PPOR to become an IP. This would be my first investment!!
I am interested in the following comment……..
As the total amount of the loan is used for interestmest purposes the entire loan interest becomes a tax deductible expense.
Does this mean that the deductions could be used by me on my Personal Tax Return and if so does that mean that all other costs contribute to the negative gearing??
I would say it depends.
As the trust will be being the property, the trust would get the deductions normally. If the trust only has rent as income, then there will probably be a loss. This loss cannot be distributed to your personal income.
A way around this is to use a unit trust and borrow to buy the units, but these have many disadvantages.
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.
