deed of partition and mortgage structure

Discussion in 'Loans & Mortgage Brokers' started by chuanglian, 8th May, 2017.

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  1. chuanglian

    chuanglian Member

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    Person A and B bought a land and intended to subdivide it and build two townhouses. One townhouse would be PPOR of person A, the other one would be an IP of person B. To transfer the 50% interest to each other, Should AB enter a deed of partition at some stage? How the new loan should be restructured after building and subdivision. Would the original loan be reassessed? AB's current income and expense etc?

    If a deed of partition is not working in this scenario, any other options? Thanks.

    Very appreciate for your advice!
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    They should consider a deed of partition.

    Ideally the loan should be 105% loan with it being apportioned and split when the titles are transferred.

    If need be set up 2 offset accounts so that A can use one and B can use another.

    Once subdivided they can then go their separate ways. A can pay down their loan debt and B can keep theirs high.
     
  3. chuanglian

    chuanglian Member

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    Thanks Terry, could you please explain
    . Why is it 105%? Is the apportion and split based on the market value of each property at the time of title transfer?
    . Should they darft the deed of partition asap? Before demolition for example?
    .does the split require reassessment of AB's current borrowing power?

    Thanks!
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Borrowing the full amount will enable B to claim more. It doesn't matter so much to A as their loan won't be deductible anyway.

    Apportionment is worked out on a reasonable basis which would be to get values when done and work out what percentage each property is of the whole.

    The deed of partition should be set up at settlement. If already settled I think duty would apply in most cases.

    You don't just need to split the loan but to take out new loans of the relevant amounts and use these 2 loans to pay out the original loan. Yes full new loan application.
     
  5. chuanglian

    chuanglian Member

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    Thanks Terry, is it possible just to split the old loan if AB now may not have enough borrowing power to get 2 new loans at the same original amount?

    Also Should AB engage a tax accountant or broker or lawyer to get the above partition and loan split done? Thanks very much.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You could split now if you know the portions. if going to split now maybe include say 4 x $20k splits so if you do get it wrong you can get the majority of it right.

    But when you split titles you will need new loans otherwise you will keep going with both on each other's loan.

    You will need legal advice about the deed and stamp duty, taxation advice about CGT and GST aspects and deductibility of interest and credit advice about the loan splits. So a lawyer, tax agent/lawyer and a broker.
     
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  7. chuanglian

    chuanglian Member

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    Thanks. Last question. If AB bought the original land as tenants in common 50% each, and they don't mind having one (old) loan, is it difficult to work out the interest deductible on investment property B in the future?
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It could be easy to do.
     
  9. Chantel

    Chantel New Member

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    Hi Terry

    My dad wants to subdivide and build two townhouses on his block with the financial assistance of a family member (she will fund it and they will each end up owning 1 townhouse each). The original house was purchased in Victoria the 1960s and it is his primary place of residence, so I believe it is exempt from CGT on sale. Is my dad able to sell half of his title to the family member and enter a deed of partition so that when they subdivide, each has one title each and CGT is avoided at that point? I'm assuming CGT would be applicable down the track if they were to sell, unless one or either of the townhouses were -established as a primary place of residence.

    Thanks
    Chantel
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes

    but they should seek legal advice before trying this.
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Dad would trigger a CGT event (A1) when he sells the 50%. The tax would be zero as its pre-CGT. However the specific concern is that he would be selling land. That could trigger GST (maybe). That needs review and tax advice. The other 50% he continues to own would also trigger a different CGT event if the use of the land is intended to produce PROFIT. There could also be GST and other considerations to consider.

    Legal advice re the proposed partition is one aspect. Tax advice concerning the whole project should also be obtained. The nature and relationships of the parties and their mutual and individual intentions need to be explored further. The use of the townhouses and a range of other issues will be affected. Living in the properties may not be the protection you think - The main residence exemption may not apply to a property you develop intending to sell - even after its lived in.
     
  12. Chantel

    Chantel New Member

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    Thanks. Re the GST, assuming it is triggered, is that roughly 10% of the sale price of the entire transaction or is it a proportion as there is already a house on it?

    Re the CGT and PPOR issues - One townhouse (my Dad's) would be a PPOR for at least 12 months (health dependent beyond that) so assuming that it would qualify for the exemption? The other (to be owned by the family member) would be a rental (investment property) and therefore subject to CGT down the track...
     
  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A personal property tax plan would address IF gst applies at all. And if it does how it can be reduced. And if GST on costs can be claimed.

    Dont assume. It can be a costly error
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There would probably be no GST until ownership is changed when subdivision occurs. Even then it may or may not apply. This is complex and expect to spend a bit on legal and tax advice - but it could save you a fortune.
     
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