Hi Guys
Im new to all of this, and have had a hypothetical situation thrown at me.
Scenario:
Person 1 – would like to invest in a property, however can not afford to enter the market on her own, and would require another party to be involved, Person one does not want to live in the property/house, P1 purely wants it as an investment.Person 2- Would also like to invest in a property, however would also like to live in it. As above, cant afford to enter the market without another party.
What would happen with rent for P2? everything else would be 50/50 (There will be an agreement drawn up of course, if it was to happen)
On paper it "lala" land it sounds like a good situation, however in reality it looks alittle scary..
Just wondering if anyone has done anything like this before.
Thanks
Jac
I think P2 would need to pay 50% of the market rent to P1. Also P2 would not be entitled to any tax deductions as it is a PPR for P2.
Hi Sallyann,
There are some issues with this, as follows:
1.
P1 will NOT be entitled to deductions if P1 also lives in the property because the tax act says about these expenses:
"any expense neccessarily incurred in the production of assessable income, unless its of a private, capital or domestic nature."
So you see you cant deduct any of the costs if its also your residence.
2.
P1 will not be entitled to all deductions if rehtal is only 50% of the market rate.
3.
What if down the track P2 says Ive lost my job cant work and cant pay rent, how do you evict them ? they have the keys and personal items in the house ?
Heres an arrangement that will work, I am assuming that each party has some cash but that P1 will have to borrow some funds from the bank,1. P2 makes a loan at market interest rate to P1.
2- P1 and P2 agree top set up a private unit trust with a company as trustee,
3. P1 borrows balance needed from bank, so P1 has 2 loans, one private and one bank,
4. P1 buys units in the trust with all the money and the trust buys the property,
5. The trust rents property to P2 at market rate, but P2 receives (taxable) interest on the loan to P1 and this reduces the rent cost,
6.P1 will agree for trustee to give 2nd mortgage on property to P1 for the loan, this can be registered or unregistered
7 P1 can also allow P2 to hold a mortgage over some of the P1 units as a second security,
8 P1 gets deduction for all interest paid to P2 and bank,
9 Property trust gets depreciation and distributes net income to P1 including some tax free income
10 If sold, proceeds can be used to repay bank debts and P1, who pays out loan to P2
They may have a separate agreement as to sharing the profit/loss.
Cost to set up about $1200-$1500 excluding loan costs
Make sure that the parties discuss this very fully and cover all issues like what if either:
Get sick, die become disabled, bankrupt etc, also probable to use mutual wills.
Regards
Anthony
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