Selling 50% of property to a friend

Hey all,

So further to a different post, my dad is looking at selling a 50% stake of his property to a friend.
It's worth $800k. With a debt of $400k or thereabouts. The property is under his name.

He has asked for my advice so am trying to gather my thoughts and see what I've missed.

Presuppositions
1. Dad can afford the interest repayments, however doesn't want to pay the principal + interest as the reduced cash-flow deducts from his lifestyle in his retirement
2. Dad wants to keep the property, mix of pride, knowing the property will keep going up in value in the long run and would like to hold onto it, and likes having the cash-flow
3. I have no interest in taking on the loan as it doesn't meet my minimum investment criteria
4. No other family member is interested due to other circumstances

Valuation
The plan is to get 3 valuers/agents to value the property. Average out the 3 estimates.
They are talking more about getting real estate agents to value the property.

Finance
The friend can fund his 50% purchase with cash, however I would imagine he would also like to explore the option of borrowing from the bank. What are some barriers. I imagine my dads reduced income may be a concern to the bank, as it will still be based on his income. However as he already owns $400k, this may not be a concern.

Not sure what implications may occur in this situation.

Tax
Selling half will incur a CGT on 50% of the estimate value of the property ($400k of the $800k).
As the property has been owned for more than 1 year, the CGT will incur a 50% reduction.
So tax is on 25% of total value of the property. 25% of the $800,000 = $200,000.

Is this correct?

Exit Strategy
No idea what they have in mind. I think just to hold onto it until they eventually pass away.

Family
My sister and I have no interest in the property, however it is important for everyone to be on-board as who knows what issues may arise in the future, what are some scenarios to consider, what will happen in the event of death, medical emergency, etc.

Other
Anything else you can think of? Would appreciate your thoughts.

 

Consider
- incapacity
- death
- divorce
- bankruptcy (to a lessor extent)

 

And any change of legal or beneficial ownership will result in new loans being required.

You also haven't mentioned stamp duty or land tax.

 

Was the property worth $0 when your father acquired it?

 

Only in my eyes.

The above was as an example.
Correct, I would have to deduct purchase and additional expenses from sale.

Eg. $800k - $500k = $300k.
50% of $300k = $150k.

Etc.
Actually...
How would it work itself out as he is selling it only 50%?

 

A lot of non financial issues. One gets sick, dies, has other debts, marries, divorces, wants/needs to sell their half...... list is endless.

 

He only pays on the percentage he is selling. His friend pays stamp duty in the percentage he is buying.

He will need a new loan, as mentioned earlier. He can’t just roll over the one he’s got now.

 

This calculator may help in calculating CGT.
Capital Gains Tax Calculator - CGT calculator

Using basic assumptions, I'd imagine the CGT tax payable will be around $25-$33k

 

Thanks everyone.

Actual loan is $260k. He wouldn't have a loan remaining.

 

If he sold 50% he could still potentially have a $130k deductible loan. This could be structured so this property is not mortgaged, with the $130k being secured against other property or a related party loan. This saves the new owner from guaranteeing the loan or being a joint borrower.

 

Hi Terry,

To clarify, does this mean he pays cash $400k, my dad pays off the loan, or leaves the money in an off-set?

 

If title is changing the mortgage would need to be discharged. But this doesn't mean the loan has to be paid off. This is why it is important to remember a loan is something different to a mortgage (and why I like to call myself a finance broker rather than a mortgage broker - I don't broker mortgages)

 

Awesome.
So can keep the funds in an off-set.

Would still trigger CGT, etc.
Okay seems like that may be useful.

 

Yeah, ideally not a situation you'd want to be in.

His repayments have gone up over $2k/month to cover the principal. He isn't in a position to refinance. $24k from your retirement party fund isn't ideal at mid 60s. He could hold on for 2 years like this without an impact, however knowing the situation won't improve, he's making a move now.

His risk profile won't allow him to look at other options like selling and becoming a money lender, diversifying into commercial, or using the money to do reno-flips or JV in small developments. Him and his mate could use their combined cash reserves to do some fun stuff instead of holding onto a 7% ROI property.

He's the poster boy for asset rich, cashflow poor. Just another lesson to learn as I carve out my own portfolio.

 

Ownership is changing...so yes

Also the interest on the $400k won't be deductible in full as he has sold half of the property.

 

Yes. His son could help pay the loan to the bank. This could be done via an interest free loan which could be repaid upon death of either party.

 

It is a high capital, low cash-flow investment.
Pumping more money into it will make it a high capital, low cash-flow investment with a slightly lower mortgage.

Better uses of funds would be, reno-flip, JV in a development, invest in bank shares whilst re-investing dividends.

My current deals in the last 6 months have been $40k in for a $2,000+ weekly cashflow uplift.

I believe not pumping money into a stagnant asset, and using my knowledge to pump my funds into higher cashflow/chunk deals will be more helpful to the family 5, 10, 15 years from now.

That stated, I am sending $1k/month their way till they figure out what they want to do. My belief is simply, a deal has to stand up on its own merit. Looking 3 moves ahead, will it help you reach your goal, or does it take you further away.