Getting the right loan structure
Question from Adam updated on 11th July 2016:
We are just checking in to make sure we have the best loan structure in place for our properties. Our plan is to buy and hold all of our properties as a future income and for our retirement.
We currently have a mortgage free home worth $2 million which we plan to live in for at least another 10 years.
Additionally to this, we have a unit valued at around $800k with $650k owing on an interest only mortgage. This is loaned into the main income earners name that pays the most tax. The property is rented out at $495 a week so it is negatively geared at the moment.
We have just purchased a home and income for $985k valued at around the $1050,000 mark. This is returning $930 per week and is cash positive under the current interest rates as we will be putting $85k down on it so we only have a mortgage of $900k. We are looking to put this into the main income earners name as well.
Are these the best options for the best tax advantages and the best way to set it up?
Our expert Mark Withers responded:
Determining the flow of profit or loss from a property investment generally isn't as simple as just nominating the name of the purchaser. I appreciate that tax rates may favor one person or the other depending on income levels and the result from the investment but guidance from the IRD says that three factors need to be considered.
Firstly, the properties ownership - ie: who is on the title. Bear in mind though that where the asset is matrimonial property both partners may be beneficially entitled to an interest in the property and its income despite what is on the title. The IRD will also look at who is liable for the mortgage. Banks lending to couples will generally go to great lengths to tie both parties into the lending regardless of what you may prefer from a tax perspective.
Secondly, IRD look at whether contributions to the property are made from matrimonial income. So for example, if the rent flows through a joint account or you both support the investment the outcome would generally be expected to be a joint split. Consider carefully whether the favouring of one person over the other is material.
In your example rent will be $48360 and interest approximately $45000. With rates, insurance and other costs added my estimate is you would be at about break even so the split of loss relative to your income may in fact not be very material at all. If you do wish to definitively direct the outcome to one party or the other consider a look through company (LTC) where the loss must flow in accordance with the shareholding. This may serve to clarify the matter more definitively that a simple personal ownership arrangement where you are jointly responsible for the lending.
Also, remember that as you retire debt losses become profits so the matter may need review. Joint ownership also tends to be a bit more inclusionary if you are planning a long walk down the property path together.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.