Tax Tip 2: Debt Recycling

Question for the experts
Current:
- Investment Property worth $1m
- Property currently owned 99 Mark 1 Jane
- Existing Debt $500k

Proposed:
- Purchase $1m PPOR
- Increase debt to $1m on IP (to re-gear)
- IP ownership to change to 100 Mark
- PPOR ownership to be 1 Mark, 99 Jane
- Cash + funds from re-gearing to reduce PPOR debt

Is there any issues with this? I'm assuming there is...

 

In addition to the above:
500k was debt on investment property, now increasing back to $1m and using funds to help reduce new PPOR debt..
New loan to be $1m for investment in new ownership structure...

 

Heaps mate!

 

Just on the tax side for a moment

Mark owns $990,000 worth of the property. He is now borrowing $500,000 to buy $10,000 of the property from Jane.



$10,000 relates to the property purchase and $490,000 to the purchase of the new main residence. Therefore only 2% of this loan could ever be deductible.



If Jane purchased Mark’s share it would work out the opposite.



Consider Part IVA – the anti avoidance provisions too.


Don’t do this without legal and tax advice.

 

Exactly my thoughts, obviously not as specific but my assumption was that only the original amount of O/Occ debt was to be deductible, and the future debt would be limited (you have clarified this @ 2%).

Thanks!

 

How about if the original ownership was 99% wife, 1% husband? and now the IP will be 100% in husbands name.... Obviously husband is now main income earner and the aim is to minimise debt on the PPOR..

Does this mean the husband is borrowing $693,000 to buy $7,000 of the property and only the original debt ($500k) + ($7k) are now tax deductible going forward?

PS: Thanks very much for your help on this!

 

? :|

 

1% of the property would be worth $10,000 if it is worth $1mil
99% worth $990,000

1% of the loan would be $5,000 if the loan is $500,000 (and all of this relates to the purchase of the property)
99% of the loan would be $495,000

So husband buys the wife's $990,000 worth of property for $990,000. She pays off her $495,000 of the loan.
Husband's portion of the original loan remains at $5,000 plus he borrows $990,000 to buy the other 99% so his new loan would be $995,000 and the interest on this would be deductible if all done properly.

 

Heaps of legal issues to consider.

 

Thanks for the reply Terry. Good to know that it's a possibility if done this way.

So to clarify, this means Husband will have a 1m loan and 995k would now be tax deductible? Regardless of the fact that prior to the restructure, the client pulled out X amount to use as deposit funds for property (existing loan was $250k debt + $250k cash out as deposit for new purchase)

Legal matters? Scenario assumes clients are in Vic and security is in Vic, so there shouldn't be too many. Can you eloborate?

 

If the loan doesn't relate to the property it wouldn't be deductible against that property.

Legal matters to consider - stamp duty, land tax, asset protection, control of the property, succession, family law, etc etc.

 

Thanks for your help on this. I guess if the purpose of $250,000 (out of $500,000) was to buy a PPOR initially - while in 99/1 and it was then bought out to 100/0 - it can be re-geared

Obviously legal advice should be sought!

 

Just a quick one. May have been covered before but I can't seem to find it.

If someone has 100k of dividend paying shares and sells the shares to pay off a 100k split that is currently non deductible... They then redraw the 100k and buy back the shares.
Is the interest now deductible against their share portfolio?

Cheers

 

Generally yes, but get some tax advice on 'wash sales'.

 

Thanks terry.

Seems too good to be true though... Couldn't it be argued the only reason for doing it could be to gain a future tax benefit via claiming interest?

So wouldn't that make it possibly not allowed?

 

Its a possibility and something you need to seek specific tax advice on. I think unlikely.

 

I need some help understanding how debt recycling can help us.

My wife has a $400,000 portfolio of VHY (an indexed ETF) and we have $26,000 in cash.

We sell part of the portfolio and use that along with the cash to purchase a small two bedroom regional PPOR.

We get a mortgage for $184,000, 80% of the property value, and use that to rebuy VHY in my wifes name.

Dividends from VHY will be approx $29,000 and approx $6,000 in franking credits. My wife has no other income.

The mortgage will likely be in both our names but will be used to invest in my wifes name. Can she claim the total of the approx $9,000 per year in deductible interest?

Would her income for the year be:

$29,000 dividends - $9,000 deductible interest + $6,000 franking credits = $26,000 income.

Tax payable is $26,000 less $20,542 (low income/tax free threshold) x 19% marginal tax rate = $1,037 tax.

Am I right in thinking this strategy saves us $1,710 per year ($9,000 deductible interest x 19% marginal tax)?

 

You should get some specific tax advice. The interest on the loan used to acquire the shares could be deductible. I don't know if your figures are correct.

 

Thanks Terry. Guess I need an accountant.

 

Or a tax lawyer!