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Selling PPOR to Trust and Renting out again!

Discussion in 'Accounting, Tax & Legal' started by Triu, 31st Jul, 2007.

  1. Triu

    Triu Well-Known Member

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    Hi I think I have asked this question before. So here goes again. If I sell my existing PPOR to my Trust can I do the following:


    • Can I rent back my PPOR since it is a IP owned by the Trust as long as I pay the commercial rent which will be Interest Only.

    • Can I then claim the interest paid as a Tax Deduction against my Income. If not why not.

    • Can I do what I want with the money received from the sale to the Trust for example buy another property which is a new PPOR or another property in another State.

    • How can I keep down the borrowing costs for buying a new PPOR – should I pay Interest Only if I buy in a good capital growth area.

    • How can I managed the negative cashflow on the IP which will be about 800 a month short – any strategies would be appreciated.


    Thanks for any help again.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, but make sure you get good advice - if not done correctly the ATO might complain.

    You can't claim the interest paid as a personal tax deduction since it is no longer your property - it is owned by your trust, and any losses are only able to be offset by income in the trust.

    There is no negative gearing allowed via trusts. This is not a problem if you trust is cashflow positive (ie you have other sources of income like shares and managed funds which you can deduct the interest expenses against - this is what we do).

    If you do sell your PPOR to your trust, the money you receive is CGT free, and you can do with it as you please. It is just as if you had sold the property to someone else.
     
  3. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Note that I have never come across a trust-savvy accountant who thinks this is a good idea. They all say the same thing - put your PPOR in the name of the least risk-exposed partner (if you have a relationship, obviously in your own name if no partner).

    Exceptions to the rule were: you work (or both work) in high risk employment (doctors, etc), are a small business owner or have some other genuine commercial reason for putting your PPOR in a trust.

    Nigel should be able to shed more light on this.

    Mark
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think the assumption there is that it will remain your PPOR for the long term - and the reason being that the CGT free status of the PPOR generally outweighs any short term tax deduction you might get from holding it in a trust (in theory).

    ... but there is a case for moving it to a trust if you are planning to change your PPOR in the near future and want to keep the existing PPOR as an IP (but still live in it until the new PPOR is ready).

    There is also a counter argument that if your intention is to never sell that property (regardless of whether it is a PPOR or an IP), then CGT will never enter into the equation, and thus should not be used as justification. You'd still need to do the sums and consider what might happen with your estate when you die - but such tax issues become very complicated and very difficult to predict for someone who is statistically unlikely to die within the next 40+ years.
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

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    Mark's right. I'm not convinced that renting from your own trust will stand up to part IVA scrutiny. Janmor the case where it was successful was pre- Part IVA where the general anti-avoidance test was narrower and was some years ago. There were specific circumstances which swayed the court in that case which may not be present for someone else.

    I'm not saying in the right scenario that it could not be successfully achieved, but I think for most people it's too high a risk strategy with limited benefits. There are other ways to achieve a level of asset protection which won't be on the bleeding edge from a tax perspective.

    Cheers
    N.
     
  6. austing

    austing Well-Known Member

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    Hi Gang,

    I tend to be leaning more towards Nigel's view lately. Although court cases in favour of the ATO have been to do with unitised trust arrangements the Commissioner has made it clear that he is not happy with it even when a Family Trust is used. I'm quite concerned about Part IVA although I don't think it has been tested in the courts with a non-unitised Trust arrangement. Regardless of whether we think it is okay or not do you want to be the one who is unlucky enough to be the test case for the Commissioner.

    Reasons that may support this arrangement include:
    1. Asset protection (a genuine need).
    2. It is not intended to be a long term arrangement.
    3. Other investment properties already exist in the trust.
    4. The property was purchased as part of a long term retirement plan.

    I may be wrong but the trouble with the Asset Protection arguement is that the Commissioner may restrict deductions to the net rent received because the predominent reason is not to produce assessible income.

    A further irritation is that Fringe Benefit tax may be incurred if you live in a home owned by a Disc Trust and don't pay market rent. So it seems like a no win and very unfair situation. It is damn frustrating when you own IPs in a Trust and due to work relocation may want to rent one of them for a few years until having to move again.

    So in conclusion I'm very annoyed and frustrated with the ATO's view on this.

    Cheers - Gordon
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Although I am no expert, and have not been in a situation where I've needed to test this (yet !!) ... I could personally conceive that I may find myself in the exact situation you describe above due to my own personal circumstances ... eg. we bought a house, but then moved interstate, it became an IP, I sold it to the trust, and I could conceivably move back and want to live in that property again.

    In the meantime, I have forgone any potential negative gearing benefits, my trust is cashflow positive (hence I pay tax on the proceeds), it is a very ordinary discretionary trust, and I would be happy to pay market rent to maintain the transparency of the cashflow (although ironically, I would most likely be living off the income from the trust, so it's just money running around in a circle in reality !!).

    I would of course get as much professional advice as I needed to ensure I was confident it would not cause any problems - but either way, I would strongly argue that I have a right to rent my property again at some point in the future - I have a clear history of it being a genuine IP, and I expect it to remain so into the future (regardless of whether it is me or a third party living in it).

    Of course, this doesn't address the question of whether I would (or could, or should) buy a new property that has no history of being an IP, via my trust and then renting it - which is another conceivable scenario I'm yet to face.

    However, there is a compromise that may suit my personal situation - I've already reaped the benefits of the CGT free status of a PPOR, plus the 6 year rule for a PPOR that you no longer live in (assuming you have no new PPOR) ... I my case, I moved out of my PPOR, rented interstate, turned the ex-PPOR into an IP, and then sold it after 6 years to my trust - CGT free.

    If I was to buy a new PPOR now, I would probably do the same again - but this time holding the PPOR as 99% in my wife's name, 1% in my name, and if I subsequently moved out again, would THEN sell it to my trust (or hold 6 years before selling if I went back to renting) CGT free. There are stamp duty costs involved, but it can still work out more effective to do this. I haven't done the numbers or looked at the implications of this yet (nor received any advice), so it's all just speculation at this point.
     
  8. Triu

    Triu Well-Known Member

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    My main concern is how can i get out the extra equity if i want to run a small business from my home. Also i may in the future want to build another 2nd storey which will give me more space.

    The reason why is so i can keep running my business from home with the wife. So there is kind of asset protection for business purposes and we don't want to sell to buy another PPOR because we might lose our customer base.

    If i pay the current interest only payment which is due on the new loan from the Trust for example is that okay also or is that a problem with the ATO.

    Or should i talk to a good accountant who understand how it all works?

    Now i am confused!
     
  9. TryHard

    TryHard Well-Known Member

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    PPOR to HDT

    Hi Triu

    We sold our previous PPOR to our HDT for logical reason we needed the equity and couldn't find a better IP plus we could sell at market value and release the dough we needed. It was win-win as it was a fair investment with good returns, but was sitting on a lump of our capital.

    The equity we used to build new PPOR. We used NickM throughout the process to make sure all was kosher. I recall he strongly recommended we do not rent it back ourselves - and we didn't. We moved straight into the new PPOR (there was a 3 month changeover while we staying in the HDT's IP but claimed ni deductions for this period as it wasn't available for rental on the open market) and installed tenants in the HDT's IP.

    In my novice opinion, if you intend to sell a PPOR to release equity and run a business from that same property, you'll be viewed quite suspiciously by the ATO. I'd go and pay for some professional advice based on your exact situation so there are no surprises. Even if you spend $1,000 it will be chicken feed compared to the risk you're potentially exposing yourself to.

    Cheers
    Carl
     
  10. Liverpool St

    Liverpool St Well-Known Member

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    IP in HDT to PPOR

    I have an IP inside a HDT. In the next year or so I will like to shift into the property and make it my PPOR. Can someone give me some guidance on how I go about shifting the property out of the HDT structure and into personal names. I have asked this question over on the SS forum but more advice is best

    Thanks

    Liverpool St
     
  11. Nigel Ward

    Nigel Ward Team InvestEd

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    There will be stamp duty and capital gains tax. It could be a VERY expensive move.

    I wouldn't!

    Cheers
    N
     
  12. Liverpool St

    Liverpool St Well-Known Member

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    HDT's

    Thanks Nigel,

    Stamp duty, I guess I have to live with that. I purchased the property 3 years ago and if the valuation comes in hypothetically $50K lower could I then offset that against the stamp duty costs?? What I am concerned about is shifting into the property keeping it in the HDT structure and paying land tax until...forever. My accountant would not be overly excited about me paying market rent a la Dale...


    Thanks again

    Liverpool St.
     
  13. Nigel Ward

    Nigel Ward Team InvestEd

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    No. The stamp duty to buy your home is a personal expense...but it may not be too much depending upon the value of the home and the state/territory you're in. If there's a capital loss on sale then the trustee can only offset that against capital gains, not to otherwise reduce the trusts taxable income.

    Fun ain't it. :(

    Cheers
    N
     
  14. Liverpool St

    Liverpool St Well-Known Member

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    PPOR in HDT


    It might be just as easy to leave it in the HDT and pay the land tax. That's what property investors do, pay tax

    Cheers/beers
     
  15. Rob G.

    Rob G. Well-Known Member

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    Does a beneficiary pay stamp duty on property distributed if they were a beneficiary at the time the asset was transferred in ?

    Might have to be a named beneficiary, can't remember and it depends on your state.

    Cheers,

    Rob
     
  16. DaveA

    DaveA Well-Known Member

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    Would love to hear a little bit more about this... Could this maybe work if a DT was a beneficiary and its transfered there?? (stabbing in the dark here)

    However, if you move into property inside the trust there is no PPOR exemption.

    It could potentially be a better move (as long as asset protection purposes isnt the reason for the trust) to keep your current PPOR and rent it out using the 6 yr exemption rule, this way you could have no land tax (believing this is the only property in your name and the rest are in the HDT), still beenfit from the CGT exemption. Plus if you sell within 6 years (or move into it again) and deprecation you claim wont reduce the cost base as it would normally...

    Then you could rent out the HDT property, atleast this way you would have some of the exemptions still..

    I would get extremily good advice though if you plan to claim deductions while renting the property out to yourselfs. In fact it would be great to see someone write (a general) article on this point....

    Always checck with your accountant before making any decisions though