Tax Tip 62: Paying Cash for a property and then getting a loan

Discussion in 'Accounting & Tax' started by Terry_w, 20th Oct, 2015.

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  1. Terry_w

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

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    Paying Cash for a property and then getting a loan


    I have recently heard of a few people paying cash for investment properties and then mortgaging them and borrowing money after the settlement. SImilar with construction of investment properties as in this thread https://propertychat.com.au/community/threads/subdivision-loans-does-this-make-financial-sense.4899/


    Usually this is much easier if you can do it. There are no time pressures with getting an approval before settlement.


    but there is one huge problem. Interest is only deductible if the loan relates to the acquisition or costs of purchasing a rental property. If you pay cash and then borrow it won’t work, tax wise, because you have acquired the asset already. i.e. you won’t be borrowing to acquire the property but to reimburse yourself. See

    Tax Tip 5: Reimbursing yourself - Impossible

    https://propertychat.com.au/community/threads/tax-tip-5-reimbursing-yourself-impossible.1737/


    One argument is that this is the same thing, but just in reverse order. It is not the same thing, but in different order. It is totally different.


    If you want to use cash then it could be deductible if A borrowed from B and then later refinanced A’s loan from B to a Bank. This may be possible where spouses are involved, or different entities are involved - but seek legal and tax advice first.


    If you buy and then borrow the interest on the borrowings could be later deductible against a new purchase, but not if you park that funds in an offset account and mix them with cash.


    Tax Tip 1: Parking borrowed money in an offset account

    https://propertychat.com.au/communi...ing-borrowed-money-in-an-offset-account.1313/



    But the situation is totally different if you are using cash from a loan or LOC. Because this involves borrowing the interest will generally be deductible in full (unless you mix it or take the borrowed funds on a detour first).


    Summary

    Taking cash from a savings account or offset to pay for investment expenses = not borrowing = bad

    Taking cash from a loan or LOC = borrowing = good
     
    spludgey likes this.
  2. pinewood

    pinewood Well-Known Member

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    Thank you for this Terry. I seem to be doing everything that's not right. First my cross collateralised loan, now this! Any more bad news for me? and what advise can you offer so I don't keep having to learn from my mistakes.....you're going to tell me to read all your tax tips!!!:(

    What if A borrows money from B to pay the 10% deposit. Then A gets loan for property..... if A pays B back from the loan account after settlement, the10% that was borrowed would it then be deductible?
     
  3. Terry_w

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

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    Loans can be refinanced without effecting deductibility as long as they are properly set up.

    So A can lend to B and then B can refinance this loan with say ANZ.
     
  4. trustissues

    trustissues Well-Known Member

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    Is there any way to avoid this issue if your parents want to gift you their PPOR to keep as an IP?

    As you wouldn't later be able to claim deductions on the interest if you decide to use the equity to borrow for a second IP.

    What if they sold you the property for $100 and you split your existing PPOR home loan to pay for it. Are you only able to claim deductions for the $100, even if you later borrowed more against the property?
     
  5. Terry_w

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

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    Buy it off them for full market value, borrow to do so, and have them gift you the cash after settlement (or potentially better, borrow at 0% interest and store in the offset).
     
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  6. trustissues

    trustissues Well-Known Member

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    Serviceablility is an issue to be able to buy it off them at full market or even half market price.

    May be possible in a year's time but we wanted to do this before the stamp duty transfer waiver expires for VIC in a month.
     
  7. Terry_w

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

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    You could borrow off them to buy it - after getting some legal and tax advice.
     
  8. trustissues

    trustissues Well-Known Member

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    What if a loan was later acquired to subdivide and/or demolish the house to build a dual occupancy townhouse? Would the loan now be tax deductible?
     
  9. Terry_w

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

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    It could be, but you would miss out on a lot of deductions still
     
  10. trustissues

    trustissues Well-Known Member

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    Why would that be so?

    Say I later borrowed 300k to finance a subdivision and knockdown rebuild, wouldn't the entire 300k be tax deductible?
     
  11. Terry_w

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

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    It might be, but would have the $500k value of the land. That would be $30,000 per year in missed out deductions
     
  12. Paul@PAS

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

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    1. If the new build is being retained to produce rent. Only from the latter of these dates : Occ cert, completion of build & available for lease. The interest on the contruction phase is not deductible and will add to the CGT costbase. Exceptions apply for business taxpayers and companies. Not isolated profit making. Deductions for vacant land
    2. If being retained to sell. Depends on who owns it. It will reduce the profit calculated so is deductible but often on sale not on the way through. Some taxpayers may claim interest as it is incurred but it may not be offset against other income until the sale profit occurs.
     
  13. trustissues

    trustissues Well-Known Member

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    I realised if the IP does get sold later on, it's much less CGT for me to have paid market price rather than been gifted.

    If the house sells for 500k then my CG is 500k whereas if i buy it for 400k and sell it for 500k then it's only 100k CG.

    A solution could be they 'gift' me 400k and then sell the house to me for 400k, I pay them back with the gift.
     
  14. Terry_w

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

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    how so?
     
  15. trustissues

    trustissues Well-Known Member

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    Because the cost basis from a gifted property is $0. Hence the CG when I sell will be 100% of the sell price.
     
  16. Terry_w

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

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  17. trustissues

    trustissues Well-Known Member

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    Terry_w likes this.
  18. Paul@PAS

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

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    That is completely incorrect. You havent obtained any tax advice. What else have you assumed or dont know ?

    Terry's sugestion to use market value is actually quite sound. CGT is based on market value. Duty will be based on market value. One concern with gifting can be affect of the former owner for pensions and other forms of support. The gift will be treated as if was still cash for 5 years.

    The legal advice surrounding such issues also will give personal advice to the asset owner on the effect of their choices. It not suggested, but in some cases family elder abuse may be a concern to a legal adviser and they will likely carefully ensure the parents have a complete understanding of the impact of surrenduring assets. A solicitor would also explore clawback issues with the asset gifting or transfer if a financial issue impacts the present owner. And the broader impact on estate planning to avoid a later family provision claim.

    Its why I dont get involved in such cases and steer any request to solicitors. They should also check tax issues or at least ensure indepenend tax advice occurs
     
    Last edited: 27th May, 2021
  19. trustissues

    trustissues Well-Known Member

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    Wow did not realise elder abuse can be a concern in some cases
     
  20. trustissues

    trustissues Well-Known Member

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    I've come up with a potential solution to this post.

    You can purchase a property in cash under your name or under a UT where you hold 100% of the units.

    You can later sell a portion or entire house/units to your spouse who borrows to fund the purchase. Now the loan would be tax deductible for the wife.

    There may be some stampy duty complications though.
     
    Last edited: 28th May, 2021

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