Strategy: 11 Strategies for when you move out of the PPOR and keep it

11 Strategies for when you move out of the PPOR and keep it

There are several things that can be done to improve the tax situation of moving out of the main residence and into a new main residence while keeping the old main residence and renting it out. Often there will be large amounts of equity in the original property while the new property will be purchased with a loan and it will have non-deductible interest payments. On top of it the rent from the old PPOR will be taxable with little to deduct!


So here are some strategies:


Strategy 1: Sell First property

If you sell the first property you can then use the proceeds to pay down the non-deductible debt on the second property and then borrow to buy another property for investment.

Spouse A owns 100%

Spouse A sells to a stranger

Or

Spouse A and B own 50% each

Spouse A and B sell to a stranger.


Strategy 2: Sell First property to spouse

If the first property is owned solely by Spouse A it could be sold to the Spouse B.

Spouse A owns 100%

Spouse A sells to Spouse B

Spouse B owns 100%

This will allow the non-owner spouse to borrow to buy the property which will then be rented out. The interest on this loan will be deductible. The advantage here is that there would be no agent’s fees and the property can remain in the family.


The added advantage is that duty may be exempt in certain states – this needs legal advice. The property may also be exempt from CGT as well.


Strategy 3: Sell share of the property to spouse so there is one owner

Where the property is held jointly it may be possible for 1 of the spouses to sell their share to the other spouse so that the end result is that there is 1 owner.

Spouse A and Spouse B own

Spouse B sells 50% to Spouse B

Spouse B becomes sole owner


This can also be done where the ownership percentages are not even

Spouse A owns 80% and Spouse B owns 20%

Spouse B sells the 20% to Spouse A

Spouse A becomes sole owner


The purchaser would borrow to buy and thereby increase deductible interest while money release is used to pay down the new loan. Similar to Strategy 2.


This may also be exempt from duty in certain states but subject to duty in others.


Strategy 4: Spouse 1 Sell 50% to Spouse B and later sells other 50% to B

Similar to Strategy 3 above, Spouse A sells 50% to Spouse B now. The house is then jointly owned. Spouse A then sells the remaining 50% to B – just after or potentially years later.

Spouse A owns property 100%

Spouse A sells 50% to Spouse B

Spouse A and B become owners 50% each

Later

Spouse A sells 50% to Spouse B

Spouse B becomes sole owner


The advantage with this is reduced stamp duty in some states such as NSW. Instead of paying duty on 100% of the transfer you would only pay duty on 50%.

See Tax Tip 50: Minimising duty on Spousal Transfers Tax Tip 50: Minimising duty on Spousal Transfers


Strategy 5: Sell to a related trust

This is more complex strategy and there are many other issues to consider.

Spouse A and B own

Spouse A and B sell to the AB trust

AB Trust becomes owner

AB Trust borrows to acquire the property and would be able to claim the interest on the loan used to acquire the property as a tax deduction.

Spouse A and B are left with a pile of cash which they use to pay off their new PPOR debt.

This would be a CGT event – but if the house was the main residence it may be exempt from CGT in full. It would likely be subject to stamp duty though.


Strategy 6: Sell to a fixed unit trust with the original owners borrowing to buy the units

This strategy will incur stamp duty, but it allows the property to be retained and for negative gearing benefits to be achieved.

Spouse A and Spouse B jointly own a property

Spouse A and Spouse B sell to the AB Fixed Unit Trust

The trustee of the AB Fixed Unit Trust purchases the property

Spouse A and B borrow to acquire units in the AB Unit Trust

Because they have borrowed to acquire units which will produce income the interest on this loan will be deductible to both A and B.

If the trust qualifies there will be land tax savings too in some states. In NSW land tax could be assessable to the owners of the units so spouse A and B will get the land tax threshold.

Legal advice is essential for this complex scenario as are private ruling applications for both OSR and Land tax. I have received positive rulings for this done in NSW.


Strategy 7: Debt Recycle A

Use the rental income from the first property to help pay down the loan on the new property.


The original property should be positive cash flow as it would have low debt. This cash flow can be used to assist in the payment of the loan for the new PPOR.

The downside of this approach is that the income from the property will be taxable and the interest on the new PPOR loan will not be deductible. But you avoid the costs and hassle of transferring title.


Strategy 8: Debt Recycle B

Use the rental income as above. But access the equity to buy another property. After capital growth has occurred sell the other property and pay down the non-deductible debt


Strategy 9: Debt Recycle C

Once you move out you start borrowing to pay for expenses associated with the property – rates, insurances, repairs etc. Everything except for interest on the loan – but this may even be possible in some circumstances.


Strategy 10: Debt Recycle D

Pay down the new PPOR as quick as possible and borrow to buy income producing assets such as shares. The income from these assets can then be used to pay down the PPOR debt even more and more income producing assets purchased.


This may be done on using a loan secured by the old PPOR too. Security for the loan doesn’t matter, what matters is that you use the debt to pay off the non-deductible debt quicker.


Strategy 11: Planning from the beginning

If you are starting out into a PPOR then simply plan ahead. You may want to consider:

- Owning the property in just 1 name as this will allow the sale to the other spouse down the track;

- Borrowing 105% from the start as this will allow a higher loan to be retained and this will improve deductions once you rent the property out;

- Borrow on an IO basis as this will keep the loan balance high;

- Borrow to pay for all repairs and maintenance;

- Borrow to pay for property related expenses such as rates, insurances etc

- Capitalise interest where appropriate (get tax advice);

- Live in victoria as this will save you stamp duty in the future if you ever sell to each other.

 

All great strategies, big question is in a state like NSW when you do sell from one spouse to another, are you able to sell at a significantly lower than amount than market value to then reduce stamp duty. Or could there be an option to avoid stamp duty altogether?

 

Duty will be chargeable at market rates. There is a bit of wiggle room with valuations but going higher or lower can other other consequences such as CGT, asset protection and deductibility of interest.

 

BTW I have written a series of posts about duty and transferring between spouses.

For NSW see
Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW

 

As a variation of Strategy 5: Sell to a related trust, instead of selling to AB trust, could Spouse A and B simply top up their loans, release the equity and then lend this equity to AB trust at the market interest rate? That way, Spouse A and B are compensated for the extra interest they will be paying on their loan top up.

With the equity release, trust AB can then borrow more to complete the funds needed to buy an investment property. Does this make the interest payment the AB trust is paying to spouse A and B tax deductible?

 

Yes that could be possible but that income is taxable to them. They would be actually diverting income from the trust (and not to it as would be the ideal).

If arms length the interest A and B pay to the bank is deductible to them, but the interest they receive from the trust is income so they would make a profit which is taxed.

The trust is borrow to invest so it could claim the interest as a deduction.

However the trust may have a loss so that is no tax saved overall, immediately, but more tax paid.

 

Yes, that is true, not ideal, but again, gets out of the hassle and costs of selling. Also, if the trust makes a loss in one financial year, it can carry that loss to the next and the next and keep deducting from its income until such time as it makes a profit, right? Do losses carry forward indefinitely?

And can accumulated losses from the trust be used to offset CGT payable when the trust eventually sells?

 

Yes it is worth considering as a strategy - number 12 maybe.

Yes losses will continue, but not indefinitely for 2 reasons:
1. Trusts must vest at some point
2. Strict rules which are designed to prevent trusts trading losses.
But a trust could carry forward a loss for many years.

yes CGT could be offset by income losses in some instances.

 

Great tips! @Terry_w if it is PPOR currently, can we borrow to pay expenses like council fees, bills, etc. and claim interest on those expenses later on when we rent the property?

 

That's a good question with no firm answer other than 'maybe'. But I would be inclined to say it is unlikely as the expense would be private while you are living there.

If it was for improvements or repairs then more likely to be a yes.

 

Thanks @Terry_w. Sounds good as we will need to install ducted AC and do some landscaping for a newly constructed house which is likely to become our new PPOR initially. Later on it will be a rental property. I plan to borrow for expenses like those to be able to claim interest later on when it becomes rental.

 

Really interesting post @Terry_w. A few questions:

Is there a risk that Strategy 3 (or indeed any of the strategies outlined) could be interpreted by the ATO as a scheme to avoid tax? What legitimate reason (other than reducing tax) could you put forward to explain why you are transferring ownership of a property?

Following on from above, does the timing of one spouse purchasing the other's share in the property offer any benefits/protection. Eg is it less likely to be interpreted as a scheme if there is a larger time gap between the transfer and the PPoR becoming an IP?

I also assume that if this strategy were adopted any current borrowings attributable to the spouse being bought out would need to be paid down. Eg if there was $200,000 left on the loan (in both names) would $100,000 of this need to be paid down if one spouse's 50% share was bought out?

 

Yes there is a risk. You need to seek tax advice before doing this.

Yes timing may help.

Yes the selling spouse would need to pay down their loan in propertion to the amount sold.

 

I like #4. Very nifty.

 

Hi Terry,

Thanks for offering your much valued opinion on these numerous strategies. i'm sure it will help a bunch of PropChat attendees.

I would be interested to know what your ball park (won't hold you to it...) expense amount would be for a trust with a corporate trustee annual fee would be for holding a property or properties in this structure as opposed to having them in a spouse, other spouse or both spouse names..

For example, if you said $5k (just guessing) net, with all red tape, accountants fees, ASIC fees, deductions, BAS, GST, dogs eating homework expenses, maintenance, etc.

As everybody is probably a fan of simplicity, and keeping Bob's Property Maintenance Services company vehicles out of the depreciation schedule, what I was looking for was really a "If you have approximately $X in a portfolio you should look at this structure, but if you have $X minus $V (ie. not much) you should really look at the Simplicity Portfolio...

How do you feel about an estimation of of $X (if it was ball park and you wouldn't be held to it)?

 

Hi Ted

I am not an accountant and don't do tax returns, but I imagine it would cost say $500 to $1000 extra per year for a trust to hold a property compared to a person.

It doesn't really boil down to if you hold $X in property then you should look at a trust. This is mainly because land tax varies so much from state to state.

eg. If you already hold $600,000 worth of land in QLD then you will need to start paying land tax on the next one, So using a trust to hold the next may result in less land tax.

But that doesn't mean you shouldn't use a trust on your first QLD property. It may still be beneficial to.

And then if you decide to use a trust you have to decide how to structure the trust and this will vary depending on the circumstances.

 

Add to the above strategies this variation -

Whatever you do you don't have to do it now. You could wait a few more years and then do it. The advantage with waiting is that there may be more capital growth and this could give great opportunity to debt recycle.

For example another $100,000 increase in value could mean another $100,000 (less a bit of tax and stamp duty and CGT in some cases) to pay off the new PPOR debt.

 

Interesting regards #4.
I used to own a PPOR 100% in my name. We refinanced against this house (joint loan), using the funds as a deposit for our new PPOR while turning the old PPOR in a rental. At the same time I transferred ownership of the rental to 50% into my spouses name. (No stamp duty payable due to spouse excemption- QLD)

Now the moment we refinanced the loan became mixed purpose and I realise the interest on the extra borrowings (used for new PPOR) cannot be claimed against however you post suggests otherwise?
Is it the case that my spouse can claim 100% of (her share) the interest and I would only claim the interest minus the new borrowings amount? At the moment I just assumed the claimable interest would be split equally but it would be beneficial the if this was the case given my partner is in a higher tax bracket than I.

Upon thinking about it I don't think this is the case given the loan is joint, for this to work I assume we would each need a separate loan, or I transfer 100% into spouses name with a new loan under her name only?

 

Hi Plucka

You spouse would have had to borrow to purchase your share of the property. But In QLD the stamp duty exemption is only available for gifts:

Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW

Your spouse can claim nothing unless she (or he) borrowed to buy your share.

But you could have possibly claimed half the interest on your existing loan – in some situations, I am not sure of your exact situation


Example
$400,000 value
$100,000 loan


Plucka sells $200,000 worth of the property to Mrs Plucka. Mrs borrows $200,000 to acquire this.

Mrs could claim interest on $200,000

Mr could claim interest on $50,000

If the loans where split along these lines.

 

Can you please elaborate on 9?