Question from Gershwyn updated on 16th May 2016:
Looking for a bit of advice... The house we live in (house 1) is currently owned by our family trust and has an outstanding debt of around $200,000 (GV $600,000). We bought a rental property (house 2) last year that is owned by our LTC and has a debt of around $600,000 ($GV $700,000). Next year we are looking to move into house 2 and make that our family home and rent out house 1.
Living in a property owned by the LTC does not appear beneficial as I would like to transfer most of the debt to house 1 and have less debt on house 2 when we move. So would it be better to change the ownership structures and have house 1 owned by the LTC and house 2 owned by the trust or leave the structure unchanged? Our intention is to keep both properties long term with house 1 eventually providing a passive income after we retire in 20-25 years time.
Our expert Kris Pedersen responded:
This is definitely something that you will need to check with your accountant. However, I believe how this should look is as follows:
Note that I have taken your GV's as market values - however, you should be checking if that is really market price as you maybe able to get additional structuring benefits by paying for a registered valuation. I have also assumed that you are outside of Auckland. If house 1 is inside just note that you should work off 70% of the market value for the rental rather than 80%.
1. House 1 will get sold to the LTC and note that you should have this with a different bank to where you have the house.
2. You will then look to have $480,000 or 80% of this properties value mortgaged up under the name of the LTC.
3. You will then look to move house 2 into the family trust and you'll hold $320,000 of debt against this property with circa $120,000 of this debt going under the name of the LTC and the remainder (check with your accountant / solicitor) either under the name of the trust or personal names.
As already mentioned above, I definitely recommend NOT putting both properties with the same bank as otherwise you are effectively cross securing all debt into the trust and negating the benefit of having it.
Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies. www.krispedersen.co.nz