Structure purchase for parent downsizing ?

Discussion in 'Accounting & Tax' started by tattoo, 7th Jun, 2022.

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  1. tattoo

    tattoo Well-Known Member

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    Parents are looking to purchase a property to downsize into for the future, and hold onto their house for a bit longer. The property will be rented out in the meantime, until they sell their house (pay whatever loan outstanding to whoever and move in)
    They are older, semi-retired, quite a bit of savings but assume no borrowing capacity.

    My sister and I are trying to work out how to help with this, and future proofing so it's an easy transition and avoid bad tax outcomes

    Current thinking of options:
    1) One person purchasing property: either myself or sister purchase property as IP. Whatever can't be borrowed, we need to cover with cash (eg. $800K property, say can only borrow $500K, $300K from parents savings/our cash). This way, can claim rent/interest/outgoings as investment for tax for one person and keep it simple. But when parent "buy" the property back, is this not so good for tax, "arms length transaction"?, CGT ?

    3) Joint purchase of property: same as above except me and sister buy together, split rent/interest/repayments - is this messy ?

    Side question: The cash I contribute will be from my offset acct (to my PPOR loan) to this IP, tax wise, I should be able to deduct the interest. Is there additional notification to bank or permission required, or is it a matter of my own record keeping as to where this cash went and costs come tax time ?

    The issue being us kids are also property investors with PPORs and pretty maxed out our borrowing.

    Any other watchouts or things to thing about ?
    Thanks !
     
    tattoo, 7th Jun, 2022
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  2. Terry_w

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

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    Terry_w, 7th Jun, 2022
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    tattoo likes this.
  3. Paul@PAS

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

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    1. Best discussed with broker as it could imapct lenders but parents could do vendor finance where you borrow $300K from them and pay interest only for example. Needs to be rigidly maintained, documented etc. However a lender will need to know and may affect your servicing BOTH of you..Perhaps all of it to each borrower.

    3. Note that each of you may have all the joint debt assessed to each of your servicing. Again broker guidance will help. Also consider legal advice on you both being jointly and severally liable for each others debt. eg If sister was unable to work what happens ? Her portion of the loan must still be paid.

    Dont draw cash from the offset and assume its deductible. Terry has loans of tips on this mistake. Better to pay back to the loan and draw a clean amount etc.

    Have parents considered super and the downsizer rules ? This could offer benefits and mean no tax on investmnet income etc
     
    Paul@PAS, 7th Jun, 2022
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  4. tattoo

    tattoo Well-Known Member

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    Thanks both. I'll chat to broker first to see borrowing capacity
    Don't think vendor finance could work as capacity is already a bit stretched, so may just need parents to put cash in directly
    Downsizer rules requires proceeds from PPOR sale, so this won't work with parent trying to hold onto PPOR for now

    Not sure this situation fits Terry's tips but that gave good food for thought of how to manage after purchasing IP and PPOR
     
    tattoo, 8th Jun, 2022
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