Strategy: Incorporating Parents into Property Planning

Discussion in 'Legal Issues' started by Terry_w, 29th May, 2016.

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  1. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Strategy: Incorporating Parents into Property Planning

    Sometimes I see missed opportunities for families to group together and work for the greater good – which is saving tax. Both sides can also benefit from the arrangement.


    One example – Parents without a main residence

    Elderly mum and dad are renting a property owned by the son. Son is negatively gearing the property as all done on an arm’s length basis, but the property is subject to CGT because it is rented out. It is also potentially subject to land tax. As well the rents will rise with the market and the loss will soon become a positive resulting in more tax being payable.


    One partial solution may be for the son to live in the property to get the 6 year rule, but he would still only have 1 main residence at any one time that is exempt from CGT.


    Another solution is to have the parents buy a property in their own name(s). This way the family group will have 2 properties exempt from CGT, land tax and income tax.


    One Potential Issue
    Parents may not be working and/or may not qualify for a loan.


    Potential Solutions
    1. Son lends them money – cash from the offset account
    a. At interest
    b. Interest free​
    2. Son lends them money – borrow from LOC and on-lend
    3. Son gift them money
    4. Son jointly purchases with them and get a bank loan
    a. Tenants in common 1/3s each
    b. Tenants in common ½ each to the son and one parent
    c. Tenants in common 10/90 or 10/45/45 with the son having the small amount​
    5. Help them get jobs! So they can then qualify for finance.


    Potential Benefits of the parents buying
    CGT
    The parent’s main residence will generally be exempt from CGT when it is sold. The family now has 2 properties which are CGT exempt.

    Where the son in part owner this portion will not be exempt from CGT, but as the portion is small the effect of tax will be minimal.


    Land Tax
    Because the property is the main residence it is exempt from land tax.


    Death
    Older people generally die before younger.

    If one parent dies and that parent is an owner their share could be left to either:

    - Other parent
    - Son
    - Testamentary discretionary trust
    - Other family member(s)​

    Which one is chosen will depend on the family situation.

    If the son dies first his spouse could miss out though.


    Asset Protection
    Not owning the property it will be better protected from creditors of the son but also future spouses and potential family law issues. It can also be protected from falling into the wrong hands if the son dies first.


    On the flip side if the parents end up bankrupt the property could be lost. The parent’s estate could also be challenged and the property lost that way – other children, former spouses, dependants etc could all get at the property potentially.


    Further Tax Benefits
    If the property passes to a discretionary trust under a will (testamentary discretionary trust) then the son could stream rental income from the property to his children who will be taxed as adults – each getting the tax free threshold. Huge potential tax savings with this for the next 80 years not to mention asset protection advantages.

    Other potential benefits could be related party loans in the future. Parents may be able to save more of their pension in the offset account and lend this to the son who could pay them a commercial rate of interest – taking care not to affect any pensions.

    Depending on the situation the parents may even take advantage of the 6 year rule and rent the property out.


    Social Security
    Generally buying a main residence won’t affect social security unless that residence is worth more than a certain amount.


    Potential Risks to consider

    - Parents go bankrupt
    - Parents wills challenged
    - Parents leave property to someone else
    - Parents mortgage the property and use the cash (reverse mortgage)
    - One parent dies and the survivor remarries
    - The child dies first
    - etc​
     
  2. Marg4000

    Marg4000 Well-Known Member

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    Main benefits would be if son an only child.

    Otherwise family issues could be more damaging than paying a bit of tax.
    Marg
     
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  3. JohnPropChat

    JohnPropChat Well-Known Member

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    "Help them get jobs! So they can then qualify for finance." - I thought banks don't like giving out loans (especially 30 year term) for PPOR if the borrowers are old.
     
  4. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    It all depends.
     
  5. Ritzzz

    Ritzzz Member

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    Interesting one Terry. Where do you reckon I could read up on using trust structures to firstly jointly buy with the parents/lending them the money interest free, initially qualify for PPOR and subsequently rent it out under the trust structure while taking benefit of the parents nil tax bracket?

    Whose serviceability will be used in the event the parents dont work but are permanent residents?
     
  6. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Not much written on trusts, try my legal tips for starters.

    If the parents buy the property in their names the trust cannot rent it out. It would only be the lender if I understand you correctly.

    The structure could be structured to use the income for servicing from any person basically
     
  7. Staythecourse

    Staythecourse New Member

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    Terry,

    I’m trying to synthesise this strategy with a few of your others. Could you tell me if there's a better way to make this scenario work?

    1. Girlfriend (A) buys IP. A and B (me) move in for ≥6 months
    2. Parents (C+D) sell their existing PPOR and lease the IP from A
    3. B purchases PPOR, A+B move in
    4. B subdivides PPOR (retain and build) within 6 years, sells PPOR (tax free), leases out IP2
    5. A/B purchase another PPOR

    I’m trying to incorporate these:
    *Buying IPs in 1 Name Only
    *Incorporating Parents Into Property Strategy
    *11 Strategies For When You Move Out of the PPOR and Keep It
    *Make the Most of the Main Residence CGT Exemption
     
  8. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Depends on what you are trying to achieve.

    Sounds pretty good, but there are a few ways you could tweak it.
     
  9. Staythecourse

    Staythecourse New Member

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    There's two outcomes I'd like to achieve:

    1. Parents sell existing property to the market and rent suitable (smaller, low maintenance, lifestyle, etc.) property from us
    2. Purchase PPOR and build additional house at rear whilst residing there. There would then be options to sell/hold - it makes sense to sell the front PPOR (claim CGT exemption) and lease out the new rear property. The intention would then be to purchase another ('dream') PPOR.

    There's a few variables to be considered, that are highlighted in your strategies/tax tips. Is there anything glaringly obvious that you would do differently with it?
     
  10. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    This is something to ask your legal adviser. I wouldn't want to comment without knowing the facts.
     
  11. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The PARENTS should also get independent legal and financial advice. Could also do more harm than good.
    - Centrelink gifting, assets tests, income tests and granny flat concessions?
    - Effect on estate planning eg your siblings ??
    - Risks to parents of being unable to live a self funded retirement due to children who want to "assist" them eg using their asset wealth but they dont benefit
    - Not all new builds are eligible for the main residence exemption. Its not always automatic. eg profit making intentions arent a CGT asset, 3month build rule etc. Just because you live in a property does not mean no tax.
    - Interaction with super ?
     
  12. Staythecourse

    Staythecourse New Member

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    OK thanks Terry.

    Paul, all notable risks/considerations and congruent with the intentions. You're right, there's a lot of facts to be considered with advisors in due course. With so many moving parts, there's an equal number of possible strategies that could play out, depending on who's giving the advice.
     
  13. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    I would argue many alternatives could play out depending on who is involved.

    I often find one party ask questions about themselves and they ignore the others. I find the parents are typically most affected by what their kids think. .
     
  14. Marg4000

    Marg4000 Well-Known Member

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    But do your parents want to move from their own home?
    Do they want to rent a property from you?
    What if your plans change?
    “Suitable”? To whom, you or them?
    Have they sought advice from Centrelink on present or possible future pension repercussions?

    Sorry if I sound negative. But as a retired person, I find a disturbing number of posts on this forum where adult offspring seem to think it a good idea to move their parents out of the security of their fully-owned home, put them in an IP which they may or may not like, simply to advance said offspring’s financial ambitions.

    Can all end badly. Saw a friend of my parents sell their home to invest in joint big home and granny flat with their daughter. All sounded good at the time. Subsequent babkruptcy of daughter and husband saw the house/flat sold to pay creditors. After owning outright a good house in Sydney’s northern beaches, friend went to living on the pension in social housing.
    Marg
     
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  15. ttn

    ttn Well-Known Member

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    I would not mind to rent from my children's IP if i am asset rich income poor. If they have IP at least it tells me that they are working on a financial goal for their future
     
  16. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    If the parents are selling their main residence then they are losing their only CGT asset going forward. What effect will this have on their pension as well as there will be different asset tests.

    What will they be doing with the proceeds of the sale. Often the adult child will try to get their hands on the cash and claim they are helping them out.
     
  17. Staythecourse

    Staythecourse New Member

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    Marg, they are looking to downsize.
    There are a few options. Selling to market > downsizing does not appear to be the best option.

    With the IP scenario:
    -Suitable for them and we would select it to meet their needs moving forward, hence it would not be a property maximised for growth/investment.
    -Sale of proceeds > diversified portfolio within super and a withdrawal rate would need to be optimised.
    -Not assessable for income and asset tests, so % age pension and rent assistance.

    This part all seems to gel, hence my initial question re strategies.