How do I sell my home to my LAQC and rent it out?

Question from Joe updated on 19th February 2009:

We have our own family home that has a mortgage of less than $10,000, with the aim to be mortgage free very soon. We also have a negative-geared rental property owned by our LAQC with 100% finance of $420,000. We are wanting to buy a bigger family home and since our current home is worth approx $560,000 we would like to know if (and how) we can rent out our current family home (via sale to LAQC?) and draw down two loans (one using existing family home equity, which would become our new rental, and one against the new family home) to buy a new family home. Could you please advise if this is a good idea and if so, how to go about doing this. Joe.

Our expert responded:

Before following this course of action, you should first decide if, based on current market values, you would choose to buy your home as a rental property. While now may not be the best time to sell, it is something to consider.

In order to make the interest tax deductible on your home mortgage, you need to sell it to the LAQC at market value (determined by a third party valuation that is less than six months old). This will mean that the LAQC will have two loans, one bank loan to cover your existing mortgage of $10,000 plus a second non-bank loan to yourselves for the balance of the purchase price.

The LAQC then takes out a loan (done at the same time as the property is transferred) for the maximum that it is able to take out. These funds are paid to you against the loan you have given the LAQC for buying the property and this interest will be tax deductible. This money then becomes your deposit for your new home and you borrow the difference to satisfy the purchase price for the new property. The interest on this mortgage will not be tax deductible.

Kenina Court is a director of Acorn Solutions Limited, an accounting firm dedicated to working with clients to help them create wealth.  She is an avid property investor, entrepreneur and seminar presenter on asset protection and wealth strategies.







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