Purchase of property and loans in different names and debt recycling?

@Terry_w - looking to understand and apply your various strategies and I'm not sure I understand
Strategy: Buying Investment Properties in 1 name only
Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW
Strategy: 11 Strategies for when you move out of the PPOR and keep it

• Homer owns a PPOR (property 1) with a loan attached (loan 1).
• Homer and Marge live in property 1, as their main residence in NSW.
  
• Homer and Marge are buying a new PPOR (property 2, loan 2) and intend to rent out property 1
• Homer earns 88% of household income and Marge earns 12%.

Questions Homer is grappling with:

1. How can the loan against property 1 be debt recycled so that the interest is deductible? Given Marge is on low income, would this need to go through AB trust to be able to borrow or is there an easier way?
2. If it goes through a trust, does the trust need to pay land tax?
3. For the bank, does the loan applicants for property 2 need to match up with the owner of property 2? i.e. can property 2 be purchased in Marge's name and the loan be in Homer's name only or Homer + Marge?
4. Can the rental income from property 1 be allocated to Marge?

 

1. related party loan agreement. But what does loan 1 relate to?
2. depends if the trustee hols land and where
3. only a legal owner can borrow against property
4. depends if Marge owns it, doesn't sound like it.

Get some legal advice.

 

The questions dont match the facts.

The problem is that you dont know how to write a scenario to illustrate what you want.

If loan 1 was used only to buy property 1, as soon as its rented out the interest is deductible. Why is debt recyling applicable here?

What is the purpose of the trust?

Homer owns property 1, so rent is to him. So do all the costs.

 

No, Marge does not own. Homer does.

Haha, yes I agree.

Fundamentally, I am looking to understand:

1. Can Marge receive the rent and interest deductibility instead of Homer. Hence either a spousal transfer or transfer to a trust to then stream to Marge?
2. Can Homer and Marge own 1 property each so that land tax is not required?

I guess the rest is fluff.

 

The 'fluff' in a well written example narrows down the possible scenarios and excludes alternatives. Without it, the only answer is 'it depends'.

Is it positively or negatively geared? Whats the point of giving rent and interest deductbility to Marge? Will spousal transfer increase the amount of debt on the IP? Whats the impact of this on the debt on the new PPOR? If one property is a PPOR, does land tax exemption apply? If so, how does that change things?

 

Marge can't earn income from a property she doesn't own. See my spousal transfer strategies and one called 11 strategies for when you move out of the ppor and want to keep it

 

Positively geared, hence giving to Marge.
Spousal transfer won't change the debt if it's a transfer, no?

This here was gold, thanks. In my case, PPOR is exempt, and the investment property does not reach the 2020 land tax threshold of $734k

New question. If the land is co-owned 50/50, how does OSR apportion?

 

It will change the debt. If mortgaged new loans will need to be applied for. If not mortgaged loans you used to acquire it will no longer be deductible.

If nsw land and jointly owned the owners will be assessed as one tax payer.

Get some legal advice

 

Hi everyone, I am new to the property chat group but greatly appreciate all the valuable strategies out here. Thank you to everyone who is offering these gems of wisdom

@Terry_w looking for some suggestions around our situation. Looking at testing the debt recycling strategy

Current Loan - $ 339000
Offset - $ 200 000
Redraw - $ 10,000

Looking at using my offset to increase my redraw to $ 20 K and set up a split loan to start a share portfolio

I am the primary bread earner and my wife runs a small business baking cakes and she is also a seamstress with income around the $ 5 K mark

Is it possible to redraw from the split loan and for me to claim a tax deduction if I were to set up the investment in my wife's name?

Secondly, rather than using the home equity would I be better off using a loan facility on an IOOF investment bond for the investment in my wife's name as the interest rate is only 1.88% ?

Any comments/suggestions would be appreciated

My intention is to test the strategy and to look at reducing my non-deductible debt by the end of the year to invest in an apartment in the city as by then I would have access to another $ 50 K of funds.

 

This doesn't appear possible from what you have described. Best to seek specific tax advice.

You will need to seek financial advice for investment bonds

 

Thanks @Terry_w .

What would you suggest as a debt recycling strategy?

Current value of my PPOR is $ 525 K

 

If you are going to invest then debt recycling can save you extra tax.

 

@Terry_w , I think I will contact you directly