Rental restructuring

Question from Yujie updated on 6th August 2018:

I currently have a rental property under my name, which is worth about $1 million without mortgage owed but locked in with Westpac. I plan to sell it to an LTC, of which I am the sole shareholder and director, at market value. I will purchase my family home worth the same as $1 million soon with pre-approval from ANZ. How can I structure to maximize my tax benefit with debt transfer to the rental rather than the family home? 

Our expert Matthew Gilligan responded:

On the facts provided, I believe you are on the right track planning to sell your rental property to the LTC. This sale will take place at market value. The LTC should borrow up to $1 million of the funds required from ANZ. The fact that ANZ will not have the rental property as security is not an issue as far as tax is concerned.

If the LTC is documented as borrower and it does so to buy the rental property from you, then you have the necessary nexus between the interest expense and rental income. Hopefully, ANZ will be receptive to lending money to the LTC supported by a cross guarantee from the owner of the home (which in our view should be in a family trust) and a mortgage against the family home.

You need to be careful moving rental properties around though. With the new bright-line rule in place, as well as a raft of other land tax provisions, you need to be careful that the sale of the rental property out of your name into the LTC does not trigger a tax liability for you. You also need to think about the implications of the LTC acquiring the property at a time when the five-year bright-line rule is in place.

In short, you should get specific advice on this transaction so that you are aware of the potential tax consequences of changing ownership of the property.

Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.

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