Transfer of gifted property - finance or sell?

Hi guys, if a property (apartment in blue chip Sydney 1m) was to be gifted/inherited, in todays climate do you think it would be better for the recipient to get finance and buy it off them, then the gets gifted the money? Or do you think it's better for the current owner to just sell and gift the money?

The only benefit I can see in financing the purchase is the tax benefits? Am I missing anything else?

There are a lot of risks at this point in time to get into this type of debt:
1. Sydney being at top of market (asset value could drop)
2. Interest rates rising (costly servicing)
3. Tightening of i/o borrowing (costly servicing)
4. Future tightening of negative gearing (any current tax benefits are diminishing)
5. Lost opportunity cost as borrowing now will affect your borrowing capacity for the near future (could be some good opportunities coming up in the next few years)

What are your thoughts?

Cheers

 

This will entirely be dependant on the circumstances. It is not good to knock back a gift but it might be good if the gift is in a particular form.

 

The circumstances of the recipient? Say 100k salary, 4 properties 1m debt, portfolio sitting around neutral. The gift is going to be great no matter what but which form would be best? A few clouds in the sky and a storm could be brewing, might be better weather it with less debt, a neutrally geared portfolio and more borrowing capacity?

 

The circumstances of both. Why does the person want to gift for starters?

If it is due to an implending bankruptcy then there are different strategies to employ compared to if they want to give just out of a desire to help.

The recipient has to consider how best to receive the gift. If the property is going to be rented out then receiving a property will mean any loan against it won't be deductible unless the borrowed funds are used for investment purposes - which may not be good if they have non-deductible debt. THey might be better off, from a tax point of view, to receive a gift of cash and borrow to acquire the property. The cash could be used to pay down other non-deductible debt and this could save them say $25,000 per year for hte next 20+ years for example.

but tax is only one aspect. My checklist for gifting is about 10 pages long as heaps to consider.

 

Ok good points. It's an early inheritance parent to children situation.

Cheers

 

There may be reasons to encourage them to keep the property. This could be safer for you if you were to have family law problems, bankruptcy etc.

It would also be possible for them to leave it via a testamentary discretionary trust which provides all the normal benefits of a discretionary trust plus children reciving income taxed as adults. - This could mean your children or your grandkids could be receiving $20k pa each tax free.

But you should seek specific legal advice on this as I don't know the circumstances.

 

Thanks Terry, greatly appreciated.

What about from a strategic point of view in respect to lending? There's alot of talk about debt reduction and avoidance of heavily negativley geared investments at this point in time of the Sydney market and general finance environment. Could anyone provide some thoughts on that?

 

On the lending side it does make a bit of a difference.

You will either take the property unencumbered or use a loan to acquire it. Most lenders have cash out restrictions so it will be be hard to borrow up to 80% for example unless you are using those funds to buy the property.

The fact that it is a unit doesn't make much difference unless it is in a high rise that is in a building or suburb that a lender wishes to avoid.

Serviceability won't change.

 

Thanks for your response Terry.

I guess the question it all boils down to is if it's a good investment or not? I.e should it be acquired through finance or should it just be sold and the cash pocketed.

Some details of the property:
- 2-2-1 in the Jacksons Landing pocket of Pyrmont
- Current appraisal $1.15m
- Current rent appraisal $950/w
- Current outgoings $10k/pa

I personally feel this market is near the peak but with such a property in such a location I don't see any dramatic decrease in capital values, maybe sideways movement if anything. I don't even know what I'm asking anymore, just fishing for opinions from more expereinced investors.

Cheers

 

If you are going to sell it could you get the gift giver to sell it first and give you the money? This way stamp duty is avoided (plus asset protection benefits
Legal Tip 2: Asset Protection and clawback provisions
https://propertychat.com.au/community/threads/legal-tip-2-asset-protection.224/
)

 

Part IVA could apply to a "gifted" item that is financed in a scheme where a tax benefit arises. eg a deductible loan. But tax is just a small part of the legal advice needed

 

Thanks Terry yes that is one of the options, basically the two options are:

1. If no value is seen in holding this property, get the owner to sell, cop the CGT and gift the money.
2. If value can be seen in holding the property, reciever gets loan to purchase property off owner, bank pays owner, owner cops cgt and gifts receiver money, receiver cops stamp duty, and takes ownership of property with a 1m+ mortgage.

I guess my question is, is now a good time to be buying to be acquiring sydney blue chip apartment? it goes against almost everything being discussed on PC recently - difficult finance environment, peak of market etc.

 

Thanks Paul, excuse the ignorance but what is IVA? I'm assuming you are saying some sort of leavy or tax might apply if such a transaction was to go ahead where a deductible loan was used to purchase a property?

 

Part IVA is a piece of tax anti-avoidance law. It basically says if you do something that is a scheme (ie a process) predominantly intended to produce a tax benefit the Commissioner can call it avoidance and cancel the benefit.

So lets say someone gifted you a property and you engineer a round robin of funds so it appears like its purchased and that is to access a tax benefit for neg gearing. Ultimately they gift the cash you borrowed back. The predominant purpose for doing it is to access a interest deduction.

 

These are the sorts of questions that I don't answer. I just explain the risks, the strategies and then leave it to the client to decide whether and wear to buy.