Divesting Property / Reducing CGT ?

Hi All,

My dad is coming up to retirement age and wants to divest his assets (apart from PPOR)
He currently owns an investment property (in VIC) worth around 400k with outstanding mortgage of 130k. He has owned it since 2000
My brother and I are thinking of subdividing and building townhouses to rent/sell

1. Can he gift the property to my brother and I? What happens to the mortgage?

2. What is the best way of minimising the CGT/stamp duty seeing as though we will knock down the existing house?

3. Is it worth the hassle of establishing a hybrid trust to own the properties with my brother and I and spouses as benefeciaries? Does it allow for the flexibility of one couple selling while other keeps leasing the property? I believe there is an advantage for income distribution as the properties will be positively geared.

4. Finally how do we minimise CGT when the subdivided properties eventually sell? Is there a limit to the 6 month rule for CGT exemption and what tax implications are there if there is no income in that period relating to the hybrid trust?

I see that many members on this forum are very knowledgeable in this area and would appreciate some guidance before we put anything into motion.

Thanks!

 

Why does your dad want to divest his assets? Won't he need them for retirement?

Are you aware of the Centrelink rules about gifting? Centrelink will count any gift he has given in the last 5 years when calculating pension entitlements.

Anyway,
1. Yes he can gift property. Loans much be paid out at settlement or the bank won't release the property.

2. CGT and stamp duty will be calculated on market value - even if gifted. You and your dad should seek advice about this - you may be able to have your dad demolish the house before you transfer the land. This should result in lower stamp duty. Not sure of the effect on CGT.

3. Hybrid trusts allow little flexibility if you are borrowing to buy the units. What is your purpose in considering a hybrid?

If the property will be cashflow positive a discretionary trust may be the way to go.

4. What is the 6 month rule?
If the trust has no income then there will be a loss which cannot offset your personal incomes. Depending on the circumstances the trust may still be able to claim all associated costs.

 

Thanks for your thoughts Terry.

He has received a redundancy payout which would push him over the centrelink threshold.

I found this example on the ATO site (Treating a dwelling as your main residence after you move out)
Though It's not clear to me if the dwelling has to be the main residence from the time of initial purchase, we will be seeking advice about this.

I will also get some advice about the benefits of a discretionary trust for our situation. If anyone can recommend a suitable specialist in melbourne that I could discuss this with, would be greatly appreciated.

 

He may be over the threshold for now, but what about the future.

Transferring the house may result in unneccesary stamp duty too. What about if your dad kept it and developed it himself - a discretionary trust may end up cheaper in the longer run with added tax savings.

That must be the 6 year rule you are referring to. see s118-145 ITAA 1997. A residence that was the main residence could be still counted as the main residence for up to 6 years absence.

If the house was rented before it became the main residence then you may have to do some apportioning.

 

hi terry

partly related to this thread

i have an investment property with a loan from a relative who is overseas

he wishes to forgive the remaining loan, and gift it to me

is there any tax implications for me or the relative?

i have been paying withholding tax to ATO on the interest payment regularly

thanks
daniel/dlaa9

 

Yes there could be tax consequences for both of you.

 

hi terry

can you clarify in what ways?

couldn't this be considered as gift?

thanks
daniel/dlaa9

 

I don't know your situation so can't say much.

Income tax consequences could result because interest under a loan will no longer be deductible. You may have a rental property fully paid off for example.

There are also various rules relating to the forgiveness of commercial debt. These may or may not apply to your situation.

There are also other rules, especially in relation to tax haven schemes.

You also have to look at the laws of the country of the lender.

You should also consider asset protection before doing anything. Best to seek professional advice.