All Topics / Legal & Accounting / Transfer PPOR (soon to be IP) to spouse but not mortgage

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  • Profile photo of paradigmvparadigmv
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    So I blundered greatly on my property purchases and am trying to make the best of an unsavoury situation…

    I foolishly paid off our PPOR (in my name only) which my wife and I had always planned to become an IP. We think its an excellent long-term renter and dont want to sell. To improve our sorry tax situation we looked for and finally bought our first IP (in my name), taking out 80% equity loan (in my name) on the PPOR and 80% loan (also my name only) with a different bank for the IP. The surplus we put into an offset account against the IP loan for investment use only in future as opportunities arise (e.g. capitalising interest, purchase of shares, deposit for next IP, etc.).

    That takes care of the tax deductibility side of things, but doesn't help if we turn the PPOR into an IP, as I will still be paying my marginal 34% tax on the rental income. So what we'd like to do now is transfer the PPOR into my wife's name (who has no income), paying no CGT and no stamp duty (this is QLD & she's never owned a home). The question is, can we do this without adding her name to the mortgage secured against the PPOR, whose original purpose was to buy the other IP mentioned previously?

    The banks I've spoken to so far have said no, but does anyone know a lender who will say yes?

    Profile photo of aussieguy2000aussieguy2000
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    For starters you are saying that you want to transfer a property which in reality is owned by the bank to her, no bank is going to let that happen without discharging the mortgage first. Just like when you sell a car, as long as there is a loan, the banks hold the item as security, that is the difference between a secured and unsecured loan – the item must remain in the name of the borrower, as your wife is not bound by the contract between you and the bank, you signed it not her. You can only sell, dispose of, gift the item after the loan is paid off.

    You say that it is your PPOR? If you still live in it, why not re-mortgaging the property and purchasing another, it is your PPOR after all, I would suggest finding out if there is any time limit on when you could move to a new property after taking out the mortgage or if you would be able to move the day after the loan is settled.

    Finally, I am new to QLD, so I am not 100% sure on the actually rules, but in NSW if your spouse, (wife/husband or de facto – meaning you have live in a relationship for more than 6 months) has owned property before, neither of you are eligible for the stamp duty exemption. (Plus remember there is a minimum period of time you have to live in the property after settlement). Even if you satisfied the stamp duty exemption, you have to live in it, making it your PPOR, meaning you can take out a loan for against the property and use it to purchase another property, which you can then live in later, and (as far as I am aware) leave the loan on the current property as tax deductible when you leave.

    If I am mistaken someone let me know please, as this is how I understand it.

    Profile photo of PLCPLC
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    paradigmv,

    Why didn't you leave any excess borrowings undrawn in the equity loan instead of moving it to the offset account? Someone can correct me, but as funds have been moved to the offset account, the initial purpose is not for investment purposes, so any future interest in not tax deductible.

    Cheers

    Tom

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    Profile photo of TerrywTerryw
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    aussieguy2000 wrote:
    For starters you are saying that you want to transfer a property which in reality is owned by the bank to her, no bank is going to let that happen without discharging the mortgage first. Just like when you sell a car, as long as there is a loan, the banks hold the item as security, that is the difference between a secured and unsecured loan – the item must remain in the name of the borrower, as your wife is not bound by the contract between you and the bank, you signed it not her. You can only sell, dispose of, gift the item after the loan is paid off.

    You say that it is your PPOR? If you still live in it, why not re-mortgaging the property and purchasing another, it is your PPOR after all, I would suggest finding out if there is any time limit on when you could move to a new property after taking out the mortgage or if you would be able to move the day after the loan is settled.

    Finally, I am new to QLD, so I am not 100% sure on the actually rules, but in NSW if your spouse, (wife/husband or de facto – meaning you have live in a relationship for more than 6 months) has owned property before, neither of you are eligible for the stamp duty exemption. (Plus remember there is a minimum period of time you have to live in the property after settlement). Even if you satisfied the stamp duty exemption, you have to live in it, making it your PPOR, meaning you can take out a loan for against the property and use it to purchase another property, which you can then live in later, and (as far as I am aware) leave the loan on the current property as tax deductible when you leave.

    If I am mistaken someone let me know please, as this is how I understand it.

    Aussieguy – hope I don't offend you, but virtually everything you have written is not correct.

    1. The bank doesn't own the house, the legal owner does and the bank just has a mortgage – huge difference.

    2. taking out a new mortgage on this property won't help with the deductions at all. Purpose of borrowings is relevant.

    3. not sure what you mean about time limits but this doesn't apply because of 2.

    4. You are confusing the FHOG with the exemption for transfers between spouses. In NSW adding a spouse on title of the main residence can be stamp duty exempt even if the spouse has owned property before.

    5. There is no minumum time you must live in the property after settlement.

    6. The last part you are confusing yourself!

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of TerrywTerryw
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    paradigmv wrote:
      The surplus we put into an offset account against the IP loan for investment use only in future as opportunities arise (e.g. capitalising interest, purchase of shares, deposit for next IP, etc.).

    Don't worry we all make mistakes. What you have done is not a mistake anyway, it is just that it could have been set up to be more effective and efficient. No many people realise these things.

    This is also a mistake – parking money into an offset account.. You have borrowed money and placed into a savings account. This is not a commercial transaction and therefore the interest is no longer deductible. Later when you go and use the funds for investing the interest won't be claimable because the funds that you will be using are no longer borrowed.

    But, luckily the ATO are not too strict on enforcing this. It is still a huge potential problem though. Especially if you have placed other money into the offset account – such as savings, wages etc. There is caselaw to support my arguement too. Domjan v FCT.

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    Profile photo of TerrywTerryw
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    paradigmv wrote:
    So what we'd like to do now is transfer the PPOR into my wife's name (who has no income), paying no CGT and no stamp duty (this is QLD & she's never owned a home). The question is, can we do this without adding her name to the mortgage secured against the PPOR, whose original purpose was to buy the other IP mentioned previously?

    The banks I've spoken to so far have said no, but does anyone know a lender who will say yes?

    What you need to do to fix this part of your problem is to sell your property to your wife. Your wife needs to buy it off you for full market value and to borrow to do so. Then later when it is an investment your wife will be able to claim all associated expenses and to negatively gear – which may not help that much if your wife is not working and doesn't have an income. There is also no income tax on incomes less than about $20,500 pa either so she would have to earn more than this to save tax.

    Stamp duty won't be exempt I think because you are transferring from one name to the other name and are doing so at market rates. If it was to remain the main residence and you were adding her name (and keeping yours) then it would be possible – but possibly only if for no consideration.

    CGT would probably be exempt but you would need to discharge the loan and to reapply again as Aussieguy correctly pointed out above.

    So, I suggest you do some figures and see if all the costs and hassle will be worth doing this. Your wife may not qualify for a loan without a job, but you could go on the loan together or guarantee the loan – with no tax effects – to enable finance to be achieved.

    You would have to rejig all your loans so as to maintain less than 80% LVR overall. But this can certainly be done. for example the new one you buy may end up with a lower LVR with the overall LVR being 80%.

    Complex but doable.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of paradigmvparadigmv
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    Thanks Terry.

    The key benefit that we would derive from the PPOR being fully owned by my wife is that when it becomes an IP she will be able to collect about 15k of rent which being under the 20.5k pa effective tax free threshold will mean she pays no tax on the income. So her taking out a loan to buy it off me at the full market value wont really help as she doesn't have an income against which to negatively gear. I was thinking of selling it to her at no consideration. The purchase would have zero stamp duty (exempt for first home owners in QLD – my wife qualifies as per OSR website) and zero CGT (because it is the PPOR).

    All the lenders I have spoken with have said that if hers is the only name on the title, she must be on the mortgage as well.  Perhaps the solution is for her to buy it from me under some kind of tenants-in-common arrangement where she owns 90% and I own 10%…? Perhaps that way she can provide a security guarantee for the loan which would be 100% in my name only?

    I really appreciate the advice I'm receiving.

    Profile photo of paradigmvparadigmv
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    Terryw wrote:

    This is also a mistake – parking money into an offset account.. You have borrowed money and placed into a savings account. This is not a commercial transaction and therefore the interest is no longer deductible. Later when you go and use the funds for investing the interest won't be claimable because the funds that you will be using are no longer borrowed.

    Oh dear… error upon error… thanks for bringing this to my attention, Tom and Terry. This looks bad. I was intending to use the offset account attached to the IP to receive rent and pay loan interest/body corp/council/repairs expenses, capitalising the difference. Certainly am not planning on placing wages or other monies not related to the IP into the offset (and haven't done so).

    After reading a number of forum posts, particularly Rolf Latham's response in this somersoft thread: http://somersoft.com/forums/showthread.php?t=69416 , I had become quite sure that the surplus funds invested in "cash" in the offset account would be interest-deductible should I use it to purchase shares, etc. But if deductibility of borrowings is acceptable to the ATO only if the original transaction was a commercial one, I haven't got a defense.

    So to untangle myself from this added blunder, would this approach work to restore complete tax-deductibility?:

    * repay the 100k surplus in the offset back into the IP loan (270k) reducing it to 170k, whose interest is fully tax deductible

    * when purchasing another IP in future, organise for a loan split to cover the deposit + sundries (e.g. 70k) for the new IP, which would be clearly for investment purpose this time

    Profile photo of paradigmvparadigmv
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    A big mistake on my part – I made the call after reading a number of posts including the response by Rolf Latham in this thread: http://somersoft.com/forums/showthread.php?t=69416

    I'm hoping I can reverse this error by repaying the surplus in offset back into the loan account, then redrawing in future for new investments…?

    Profile photo of PLCPLC
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    With normal personal funds in an offset, this would be okay (repay, then withdraw with a separate account), however I'm not sure what the scenario is with borrowed funds. I'm sure Terry has a better idea.

    Also why would you repay it into the IP loan and not the PPOR loan? By repaying it into the IP loan you are losing deductibility.

    Cheers,

    Tom

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    Profile photo of PLCPLC
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    Why are you against your wife's name on the mortgage?

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of TerrywTerryw
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    paradigmv wrote:

     

    So to untangle myself from this added blunder, would this approach work to restore complete tax-deductibility?:

    * repay the 100k surplus in the offset back into the IP loan (270k) reducing it to 170k, whose interest is fully tax deductible

    * when purchasing another IP in future, organise for a loan split to cover the deposit + sundries (e.g. 70k) for the new IP, which would be clearly for investment purpose this time

    This won't work because you would now have a mixed loan. Each payment into a mixed loan comes off each part of the loan in proportion of the loan amounts.

    So if your current loan is 270,000 with 100,000 of this sitting in an offset:

    100,000 private debt = 100/270 x 100 = 37%

    170,000 investment debt = 63%


    270,0000

    So if you placed 100,000 back into this loan then 63% of this amount must come off the investment portion.

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    paradigmv wrote:
    Thanks Terry.

    The key benefit that we would derive from the PPOR being fully owned by my wife is that when it becomes an IP she will be able to collect about 15k of rent which being under the 20.5k pa effective tax free threshold will mean she pays no tax on the income. So her taking out a loan to buy it off me at the full market value wont really help as she doesn't have an income against which to negatively gear. I was thinking of selling it to her at no consideration. The purchase would have zero stamp duty (exempt for first home owners in QLD – my wife qualifies as per OSR website) and zero CGT (because it is the PPOR).

     .

    This makes sense then. If your wife is not going to be claiming interest etc then you don't need to worry about deductibility.

    But what you have said about stamp duty cannot be correct. I have had a look at the Duties Act QLD and cannot see any relevant exemption except when adding a spouse to title to the main residence, s 151

    http://www.austlii.edu.au/au/legis/qld/consol_act/da200193/s151.html

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    paradigmv wrote:
     

    All the lenders I have spoken with have said that if hers is the only name on the title, she must be on the mortgage as well.  Perhaps the solution is for her to buy it from me under some kind of tenants-in-common arrangement where she owns 90% and I own 10%…? Perhaps that way she can provide a security guarantee for the loan which would be 100% in my name only?

     .

    Yes, all owners must be on the mortgage or guarantee the loan. But as Tom says why worry about this? Why do you want the loan in your name? Deductibility to determined by use. If you are going to be using a LOC attached to this property then she would be onlending the money to you.

    If she cannot get a loan because of lack of income then all you have to do is to guarantee the loan or even go in a joint borrowers.

    This thread shows the importance of getting proper advice from qualified people before doing things. Don't take tax advice from a broker or credit advice from a lawyer as they don't know and cannot advise in areas outside of their knowledge.

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    Profile photo of paradigmvparadigmv
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    Tom,

    My understanding is that if my wife who is not working and does not derive an income is on the mortgage, I can only claim 50% of the loan interest as deductible.

    Happy to be corrected if wrong.

    Profile photo of TerrywTerryw
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    paradigmv wrote:
    Tom,

    My understanding is that if my wife who is not working and does not derive an income is on the mortgage, I can only claim 50% of the loan interest as deductible.

    Happy to be corrected if wrong.

    Wrong.

    who used the money and what was the money used for?

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    Profile photo of paradigmvparadigmv
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    This is the equity loan I've taken out over the PPOR currently in my name. The loan was at 80% LVR of the PPOR value and was fully directed to purchase the IP (which I'm having the offset dramas with).

    If I transferred the property to my wife's name or go tenants-in-common with her, then that would mean the loan would have to be refinanced. If her name is added to the loan after refinance, doesn't that mean that I can only claim 50% of the loan interest as deductible?

    Profile photo of paradigmvparadigmv
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    I know of the existing exemption when adding a spouse to title of main residence as you rightly point out, but this is a separate concession that applies here.

    The QLD govt brought in a zero stamp duty concession for first home owners' purchase of a main residence effective from 21 Sept 2012.

    http://www.osr.qld.gov.au/duties/transfer-duty/exemptions-and-concessions/concessions-for-homes.shtml

    Profile photo of TerrywTerryw
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    paradigmv wrote:
    This is the equity loan I've taken out over the PPOR currently in my name. The loan was at 80% LVR of the PPOR value and was fully directed to purchase the IP (which I'm having the offset dramas with).

    If I transferred the property to my wife's name or go tenants-in-common with her, then that would mean the loan would have to be refinanced. If her name is added to the loan after refinance, doesn't that mean that I can only claim 50% of the loan interest as deductible?

    Since ownership is changing you would have to take out new loans. You could treat the existing loans as a 'refinance' so the amount changes. If there were 2 names on title then you used the money for other investments then nothing changes in terms of deductibility. You can still claim all of the interest.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    paradigmv wrote:
    I know of the existing exemption when adding a spouse to title of main residence as you rightly point out, but this is a separate concession that applies here.

    The QLD govt brought in a zero stamp duty concession for first home owners' purchase of a main residence effective from 21 Sept 2012.

    http://www.osr.qld.gov.au/duties/transfer-duty/exemptions-and-concessions/concessions-for-homes.shtml

    I dont' know QLD laws, but would be surprised if this allows one spouse to buy and get the grant when the other spouse has previously or currently owned property. Why not give the OSR a call.

    If it does then it will be a significant opportunity.

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