Hi everyone,
I am looking to purchase a property with my sister as she cannot afford to buy a property on her own and thought that this might be a good way for my husband and I to start off with a small investment. My sister has a decent deposit but not the ability for high ongoing repayments whilst we do not have a deposit but good incomes.
My question is, we will purchase the property together so that my sister owns 50% and my husband and I own 50% (or 25% each) but my sister will put in the whole deposit. As we need to use the investment property as security (say it costs $300K to buy) all three of our names will be put on the morgage but the broker will structure a split loan such that we will have a loan for our half the property (say $150K), and my sister a small loan for her half (ie half the cost minus her deposit) (say $150K-50K deposit = 100K). We want to do everything completely in line with ATO requirements so she will pay us 50% of market rent. As she plans to put in the whole deposit the total loan is for 250K whilst we essentially have an investment loan for $150K of that. Will the ATO only allow us to claim 50% of the interest repayments which would be on $125K or since we have use the whole $150K for the purposes of buying our share can we claim the interest on this amount?
It is a confusing situation, im just not sure how the ATO will see it, especially as this will not be an investment for my sister but rather her PPoR
Your loan is for $150k. You get to claim the whole interest on that loan against your rental income.
Take a loan for the full $150k, dont tip any other money into it. That way you are maximising your interest deductions.
Only pay the loan off at the bare minimum, and use any spare income/rental income etc to smash your current home loan since there is no tax deduction for this.
You will also be entitled to claim for 50% of things like rates, insurance, minor repairs etc.
If it was me, I also wouldnt be to frightened to put some personal things in there, like shrubs, touch up paint, minor hardware expenses you use for home in as a rental expense.
Just ensure your loan is in your names solely, and hers in her name solely.
Also note you may need something other than a simple contract of purchase. It shouldnt be the same contract say your husband and you used to buy the home, I cant remember what they are called but it makes it much more structured in who owns what.
For example, with you and your husband, both or singular are responsible for the repayments.
With you and your sister, you dont want to be responsible at all for hers.I would be speaking to a property savvy accountant BEFORE you do anything.
Personally I think it's too messy. Is your sister going to have enough money to pay her loan repayments + half market rent + ongoing costs?
Speaking of ongoing costs- who will pay them? Rates, water, insurance?
Are you assuming there will be good capital growth? If there is none you and your husband are going backwards.Do the figures. That will tell you whether it is worthwhile to you. Post the figures here if you want further comments. Eg What is market rent, how much will the purchase be? Don't forget stamp duty, solicitors costs etc. Also keep in mind the first home owners grant. If you buy it with your sister and she lives in it you my void that for yourself. You don't lose it if it's an investment but as your sister will be involved in the contract and will be living there it's a grey area I think.
You need to consider ALL the implications first.
good luck.I would buy an investment (together if you wish) in an area with high yields and rent it out. Your sister can rent something separately.
Thanks guys,
We have thought and looked into this a lot and yes all the sums work out in terms of my sister affording to pay her part of the loan and full market rent plus half of all the incidentals, rates etc etc. Basically on ongoing costs it will be straight down the line. We hav spoken to a morgage broker and financial adviser and have been advised there is no problems with setting up this arrangement, but I didn't specifically clarify having all three names on the morgage. We have been extremelely careful with this and we are all confident that this can be a win win situation. The main question we are not sure of is the tax side of things as there is no way that we can get a separate loan from my sister as we are using the investment as security on the loan to entirely protect our PPoR and morgage. Hence as we cant get entirely separate loans we will simply use a split loan for the morgage on the investment so that we can take care of our 150 and my sister her 100 – and if she wants to make extra repayments etc it doesn't get confusing as to who owns what. At the end of the day of course we are liable for the others loan if one of us defaults.
I just don't know whether if we keep the paper trail of her paying the deposit and then the loan sizes have been adjusted based on what was originally put in if this is enough for the ATO to appreciate our half really is 150K and not half of the morgage!
In terms of the contract it doesn't matter who owes what or pays what. You each own half. How will you buy? (tenants in common?) that way you can will your half to whoever you wish.
Also- What is the exit strategy? How do you gain from this? Is there a plan to sell later to access the equity? Or is your sister planning on this being her home? If so how do you get your money back?carefully look at how this is structured. If you buy in your own name, & live in it, then it is your ppor. If you buy in a trust, then you may be able to rent it to yourselves.
You don’t mention if you qualify for fhbg but be wary that you will be sharing it between all parties not getting 2 grants.
The trouble with this is that deductibility depends on the names of title – in general.
It may be possible to have separate loans, by your sister guaranteeing your loan and you guaranteeing her loan, but this may not be effective for you to claim the entire interest on your loan.
So you should check with an accountant before doing anything.
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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