Tax Tip 53: Paid Deposit with cash - how to fix big mistake before settlement

Discussion in 'Accounting & Tax' started by Terry_w, 12th Oct, 2015.

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  1. VS_2019

    VS_2019 Member

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    Thanks Paul. This relates to the desire of settling without using the deposit. The vendor's agent wants their fees been held by vendor's solicitor and then refund to purchaser via PEXA. The balance of the deposit will be refunded from the agent directly to the purchaser. With this arrangement, can I say the deposit is 100% not used for the settlement?
     
  2. Terry_w

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

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    Can you rephrase that?

    Are you borrowing 100% of the purchase price and using that to pay the vendor?
     
  3. Paul@PAS

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

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    If you used borrowed $$$ for the deposit its deductibility would be severed by the arrangement and any interest incurred while it was advanced may be non-deductible for that interim period (since its never used to acquire an interest). If another loan is then used for the borrowed $$$ (ie 100%) then it acts as its replacement. Provided you repay the deposit loan if it was borrowed I see no issues.

    If the deposit was paid using cash I see no issue. The original deposit is repaid under this arrangement and the settlement uses borrowed funds and settlement should be OK. You (and not vendor) seem to have acquired a asset risk.

    Lets see how Terry sees it. This arrangement seems unorthodox and may even place a vendor at risk (not that concerns you). Is there a actual "deposit" or is it just funds on a REA trust account as security for settlement that may be unenforceable (??) As it will be settled it may never be tested. Not sure a lawyer for vendor would agree on this arrangement .
     
    Last edited: 17th Jan, 2020
  4. Paul@PAS

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

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    This arrangement also occurs when buying a car. Buyer drops a deposit of $2K. Applies for dealer finance. Lender approves finance and asks if the buyer wants their deposit financed and repaid. On pick up lenders pays the $2K to borrower and loan is now 100% of the settlement
     
  5. VS_2019

    VS_2019 Member

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    I used "borrowed" money for the deposit but due a series of mistakes, only a third of that can be safely deemed as borrowed money. The bank gave me 105% loan for the purchase. One option is to refinance the existing loan (10%) into the new loan and bank provide 95% for the settlement. The other option which I prefer is to close down the existing loan and have a clean start using 105% for the settlement.
     
  6. Paul@PAS

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

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    I believe the deposit interest isnt deductible at all. The proceeds have not been used to produce income or acquire a interest in income producing property. At best its just sat in a REA trust account as secondary form of security for the eventual purchase.

    It may be arguable that the deposit was held by the REA for the contract and that at some point in time it is released as a deposit in exchange for the new loan. On that basis it could be deductible on a refinancing basis which would mean interest deductible up to the actual settlement. A private ruling would be prudent but if it was blended (eg your comment re 1/3rd) this could impact the later full deductibility on final settlement for the deposit portion of the new loan.

    I would be keen on terry's view too
     
  7. Terry_w

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

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    The agent holds the deposit on trust for both parties until settlement and then it is on trust for the vendor if required to be paid over, and until paid over. So if not need at settlement it belongs to the purchase and should be refunded to them.

    I am not entirely sure what is going on here so would not like to guess an answer.
     
  8. VS_2019

    VS_2019 Member

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    I would not concern about the deductibility of interests charged by bank prior to the settlement. What I try to make sure is my 105% loan yet to be drawn for settlement will not be contaminated or have a mixed-use component. That is why I prefer to have a clean (re)start from the day of settlement. To achieve this, I need to make sure that new loan is fully used for the settlement.
     
  9. Paul@PAS

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

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    If it's a concern why not have a personal tax adviser? Maximising deductions v maximising equity are very different. One is debt and one is wealth. Don't be fixated on maximum debt. It can only be a element of a long term strategy and isn't a strategy itself
     
  10. thesuperman

    thesuperman Well-Known Member

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    Any possibility of doing this strategy for a 1st property purchase in a way where a person wants to purchase an investment property who intends to rent it out, but firstly completely moves into the property immediately on settlement for a few months to gain a main residence exemption. A few months later he/she rents it out. Would that type of strategy work where the interest would still be tax deductible or wouldn't be because that person moved in after settlement making that property a main residence for a couple of months?
     
  11. Terry_w

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

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    If a person paid 10% deposit with cash that is locked away. But if they borrowed it they would be all good.

    I think there is a tax tip on this.
     
  12. Unyonion

    Unyonion Member

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    So this is no where near a serious issue (only $1000) but in principle its still deductible ;)
    On acceptance on my offer on the IP the agent wanted a $1000 deposit, which I paid in cash as had not set up finance yet.
    Is this applicable to this thread and should I attempt #5 and pay settlement funds in full and then the deposit would be refunded to me? Or just not worry as it's such a small amount. :rolleyes:
     
  13. Terry_w

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

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    You should seek tax advice. This is exactly what the thread is about. But interest on $1000 is about $30 per year.
     
  14. Paul@PAS

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

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    If the settlement sheet doesnt USE the deposit paid then I dont see that its a element of the acquisition cost. Its merely a security deposit (like a guarantee in monetary form) until settlement occurs. Each case could vary too. It could actually be a outgoing and a later recoupment and so any interest in the period prior to settlement could even be deductible if its an IP. Personal advice best obtained.
     
  15. Invstr

    Invstr Member

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    "Never pay for a deposit on an investment property with cash if you can avoid it..."

    What about for a PPOR? I've read several of the strategy / tax tips and loan tips posts, but I can't seem to find an example where Tom, Jerry, Bart or Lisa already own an investment property and are looking to purchase their first PPOR.

    In this situation, the IP LVR is around 50%, IO loan (no principal has been paid) all cash in an offset account.

    How might one pay purchasing costs and deposit on their first PPOR?
     
  16. Paul@PAS

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

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    using the offset cash would make sense. But if the main resdience later was to become a IP it could also exhibit reasons why its not a good choice too. Perhaps the smart thing is to borrow the max on the new home and move the offset cash to a offset on the non-deductible loan. Depends on capacity, servicing and more. Sounds good in theory but may fail in practice. A lender will still look at the loan obligation. The fact its 100% offset doesnt eliminate their risk.
     
  17. Invstr

    Invstr Member

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    Thanks Paul, just to clarify, when you say 'borrow the max on the new home', as a general example, do you mean the 90%, and then I just pay 10% deposit, SD etc with cash?

    For what its worth, once we purchase the PPOR we'd look at using a debt recycle strategy.
     
  18. Terry_w

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

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    I advised a client on this very thing today - borrow 105% for the main residence then shuffle loan over with debt recycling.
     
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  19. Paul@PAS

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

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    I really dont know. Guessing
     
  20. Mlee17

    Mlee17 Well-Known Member

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    Hi all. The understanding i am getting from this thread is that we fix the mistake before settlement by using "borrowed funds" and pay that to the vendor at settlement.

    And any excess cash will be returned which is the non-borrowed money? Sounds a bit like money laundering:D