Strategy: 11 Strategies for when you move out of the PPOR and keep it

Strategy 13: Spouse A sells 50% to Spouse B

It seems that I missed this one in the opening post. This can work well in NSW as there could be a full stamp duty concession where both spouses end up being 50/50 owners or Joint Tenants.

I have just written another thread explaining this one at:
Strategy: 50% Spousal Transfer Strategy to Increase Deductions

 

I originally took out my mortgage as an investment loan ~50% Fixed / 50% variable.

Once it settled, I informed the bank that I moved into the property and so they reduced my interest rate on the variable loan accordingly (the fixed loan didn't change).

6 months later, I moved out and rented out my property and forgot to advise the bank that it's now an investment.

Question 1:
Is the interest in the fixed component deductible once it is rented out? The product name specifically states that it's an investment property loan.
Question 2:
Is the interest in the variable component deductible once it is rented out?

 

It is irrelevant what the loan is called.

 

PBR 1012962612531
Legal Database

the ATO keeps changing their website around.

 

"Live in victoria as this will save you stamp duty in the future if you ever sell to each other."

Valuation / Debt owing question:

Current IL (old PPOR) loan debt is $85,500, which is in partners name 100%.

- 26 more years to be paid minimum payments.

- Purchase price: approx 200k
- Current value: approx 400k / 450k (minimum)

Worth it to purchase 50% of partners property?

Or should we leave it as 100% ownership and / or pay off the loan right now (PPOR offset account balance)?

 

The stamp duty laws in vic have changed since I wrote that:

Tax Tip 161: The new Duty on Spousal Transfers in VIC Tax Tip 161: The new Duty on Spousal Transfers in VIC

it can still be worth selling between spouses and paying duty.

 

Hi @Terry_w , thank you so much for your tax tips they make a complicated subject easy to understand!

I'm thinking of using strategy 2, and selling my PPOR to my spouse before we move out and turn it into an IP.

I've read all of your relevant tax tips that I could find and I've talked to both my solicitor and tax adviser and nobody raised any red flags. I just wanted to ensure I understand the process so I don't screw it up in the execution:

PPOR in QLD 100% in my name valued at $400,000 purchased 5 years ago.
New land just purchased in QLD 50/50 split with spouse with joint loan with plan to build and move into it in approx 14 months time.

Lender A Split 1 for PPOR $55,000
Lender A Split 2 for new land deposit: $45,000
Lender B Loan for new land $150,000, estimated extra $350,000 for build.

Current PPOR will be massively positively geared as is, whereas it will be neutral/slightly positive geared if sold. I'm also on quite a high tax bracket whereas my partner is earning less than 20k/year and this will reduce in the next couple of years when we have kids.

The plan is:

1. Get valuation done of PPOR by valuer or 3x real estate agents and average, use this as sale amount.
2. Redraw 20% deposit plus costs plus buffer, say $100,000 from Lender A split 1 and 2
3. deposit this into joint Lender B loan
4. Create $100,000 split in the joint Lender B loan.
5. Organise another joint loan with broker (lender C) to finance my spouse's purchase of the property from me. (will need to be joint for servicing reasons)
6. Organise with solicitor the sale contract etc.
7. My partner will Redraw deposit plus costs from this split directly into solicitors trust account, or if this is not possible directly into a brand new joint transaction account with a zero balance (noting you say this is maybe territory and not ideal)
8. Sale is settled, Lender C pays out Lender A Split 1 and 2 at settlement and "profit" will be deposited into my transaction account.
9. Balance of split will be used for IP ongoing costs once we have moved out. (Thank you for the debt recycling tip)
10. 105% of IP will be borrowed funds and deductible.
11. "Profit" will be used for deposit for construction loan and whats left will be in an offset account attached to new PPOR.
    

From here my partner will live in the property until our new house is constructed and will then turn it into an IP.

Does this sound right? If so then the only things I'm not clear on are:

1. Is my partner able to borrow the borrowing costs (solicitor, stamp duty, transfer fees) using the same split as the deposit even though it will be a PPOR initially without damaging interest deductablity once it's turned into an IP?
2. If the solicitor overestimates his fees and refund $100 via cheque, if this is deposited directly into the Lender B deposit split where it came from is that ok?
3. Do I need a PBR around Part IVa or is it enough that I'm doing this to provide her an income while on maternity leave and division of assets etc not just for tax benefit?
4. Any traps with where I put the "profit" between now and when we have to take out the construction loan? Ie offset account on Lender C loan or my spouse's Savings account?
5. And one I just thought of, my partner claimed the first home vacant land concession for her half of the land we purchased, it obviously would have been better to have done this first but the land purchase happened in a hurry! Would this purchase "undo" her elegibility for the first land owner, or better yet is she able to pay back the concession and use the First home concession instead seeing as the eligibility only refers to owning interest in a "residence" and having claimed the first home vacant land concession? (duty of $5250 vs $1700).

Thanks for your help!

 

The repayment of the first home concessions should have been part of the legal advice. And QLD duties laws, CGT too....Your ownership affects your spouse too..

The CGT choices for a newly constructed home will be impacted. Resetting the costbase on a % of ownership of the existing PPOR may not be desirable. Your choice needs some tax advice I suspect. It effectively could add to tax costs in the long run. Remember that between the proposed new home and the former home only ONE can be a main residence at any time and the newly constructed home may be a better choice if the completed residence will have a good unrealised gain. One of the benefits of a new build is that the CGT cost can be backdated but if there is a former residence this is affected.

 

How will your spouse get a loan if on maternity leave? Will she qualify on her own?

You should seek specific tax and legal and credit advice, I am unwilling to give any confirmations based on the info at hand.

You need to consider Part IVA

 

Thanks Paul, thanks Terry, fair enough I will have to go back to the accountant and solicitor and press them for more info, it sound's like we didn't have the full conversation the first time. The CGT discussion didn't get much past the fact that I won't have to pay any for this sale, I'll have to question them on the effect on any future sales.

Terry, the new loan will have to be in joint names as she will not qualify on her own.

As to Part IVA the tax advice I received was that it was a fairly common occurrence and that I wouldn't need a PBR, I was interested to see if you agreed, so thanks I'll discuss that with them further.

 

One concern I would have is can you borrow to pay yourself and still claim the interest.

 

I would be wanting end to end advice on the whole proposed arrangement. Thats what Part IVA would consider if it was implemented. Armed with tax advice then a lawyer may advise on the relevant loan agreements etc that are required.

 

Hi,

I had a question regarding our situation.

We purchased a house in 2014 under my spouse's name and lived in it for 5 years. A little bit of principal was paid off but most of the loan was left at IO for the majority of the time. In 2018 we transferred the property into my name for asset protection purposes, purchasing the property at market rates. The loan was refinanced with a different bank at the time and kept interest only.

We then purchased a new property in 2019 and moved into it as our PPOR, turning our old PPOR into an IP. When it comes to tax time, it was my understanding that the interest on the loan against the investment property is tax deductible (strategy 2 from above).

Is this correct?

 

It could be.

Did you borrow to pay him? Under a written contract? Market value?

You can't refinance a loan from his name to your name so you might have some issues.

 

Thanks terry

It was purchased at market value (in Vic so no stamp duty). The ownership was changed 100% from his to mine, for asset protection due to his profession.

Not sure what you mean by borrow to pay him or can't refinance from his name to mine? Isn't that what is required for sale of property, or does the loan amount need to be kept the same?

 

To buy something there should be a contract. Contracts can be oral but not for land. I guess market value was written on the transfer? At settlement your loan would have paid out his loan. It might pass with the ATO but you need specific advice.

Did you get legal advice on the asset protection side? It may not be as protected as you think

 

I don't remember signing a contract, just lots of loan documents. It was definitely at market value. We went through our conveyancer, mortgage brokers and state revenue office. Yes the loan paid out his loan.

 

but not a lawyer!

 

The legal advice should also have addressed the tax issue. Conveyancers cant do that or advise on asset protection. Just because his name isnt on title doesnt mean its protected. Especially if the loan is in two names and his 50% wasnt settled.

What is the property costbase ?
That may not be too relevant as it was your home. However back in 2018 there will be a CGT event (exempt?) to report for him and then when it becomes a IP s118-192 may likely apply and reset the costbase anyway....at market value at the time in 2019.

The matter likely needs some review. If the property and loan were placed solely in your name at that time its likely easier to determine. But its also possible there are still two borrowers which doesnt limit the tax position but could be a legal concern. BUT....how did you discharge the purchase by buying the other 50% ? It could mean 50% of the loan is non-deductible. And if hubby is helping pay the loan its not going to support the view he has no interest in the property. Or an accrued interest as at 2018

 

Thanks for your replies.

The home was initially purchased in 2014 for $460,000, 100% in my partners name and his name on the loan. It was then transferred to myself 100% in 2018, at market value of $630,000, and refinanced at the time also (although this loan has both our names on it). CGT exempt as it was a PPOR.

I am able to pay the loan off my own income (although repayments are coming from our joint account). I seem to be getting differing answers regarding how much of the loan is tax deductible? Yes, a lawyer at the time would have been useful..