Ask Ban Tacs Question
Hi Julia,
Its great listening to your advice on the Property Couch. I e-mailed you through Empower Wealth and I was directed to this site.
I was hoping I could get some clarification on a property purchase/transfer to see if we proceed and execute it correctly if it will have the best financial/Tax outcome for us going forward.
My wife Carlys current PPR has a remaining loan of $225,000 (original loan of $400k original purchase price $485k), with an estimated value of $1.2 to $1.4 million.
I don’t have a PPR and haven’t had one since 2004. We have lived in the property for the past 13 years. Property located in N.S.W.
I’m looking at the possibility of purchasing 50% (or whatever percentage makes the most sense for future taxation) of my wife’s PPR for around $340,000 – $400,000
Carly’s funds from the part sale of her PPR (340k-400K) $20k-$30K would be used to complete the bathroom renovation and install 2 A/C units in our PPR
The remaining $300-$360k would be kept in Carlys off set account for her $225k PPR loan and another($200k) investment loan she has.
It would then be used as the deposit for the next property (most likely our new PPR) we are going to purchase late 2025 early 2026
Our son is in year 10 so we would most likely stay at the current property for the next year while he finishes year 10 but we would also be looking for our next home late 2025 early 2026
i have contacted a solicitor and By all accounts we appear fully eligible for the Spousal exemption 104B for the stamp duty , so stamp duty won’t be payable for the part sale.
My main question is:
Would the $340k-$400 loan I take out to purchase my part of the property off Carly be a tax deduction in the future when the property is eventually rented out in a year or two ? Can we prove a sale was actioned without a full contract of sale or would it be best to pay the 2 x $2000 conveyancers fees to execute the sale ?
We’re aiming to buy a new PPR slightly smaller property in the range of $800,000 to $900,000, which will be in both of our names.
The current PPR will then become an investment property in the future say 1 to 3 years with a combined loan of approximately $560k-625k and expected rental income of $1,100 – $1,200 per week and would be cash flow positive.
Many thanks for your time.
Answer
Please check with your solicitor because I think the stamp duty exemption is only if the property is a gift, not you buying a share. If you are not buying your share then the interest on the loan for the money you pay to your wife is not tax deductible. So in regard to the conveyancing fees you will need to inform the titles office, the bank you are borrowing from will need to put a mortgage on the property so I think you will need a solicitor unless you have some experience in this area. You need to set it up as a sale. Also consider that the bank already has a mortgage on the property so you will need to go with the same bank and they are going to want you both on that loan document so then I recommend another loan document where your wife lends you her half of the loan so you can pay her for half the house! Mmm but there is more that undermines the legitimacy of this arrangement.
The next issue is what possible reason could you have for borrowing to buy out your wife’s share of the house other than the tax benefit? If you do not have another more dominant reason then the ATO can apply Part IVA and deny a deduction for the interest. If you end up paying stamp duty to “buy” part of the house and still do not get a tax deduction for the interest that is a huge cost for no benefit. In fact, when you look at the stamp duty cost it may not be worth it anyway, even if the interest is tax deductible. So back to the dominant purpose. I have had clients apply for a ruling on whether Part IVA applied in a spouse transfer, with success. But in both cases they were talking about moving the ownership from joint to only one spouse owning it. The successful argument was that he wanted to keep the old main residence as an investment and the wife wanted to sell and pay down debt on the new house, so this was a compromise that he buy her out. But if the interest was not tax deductible he could not afford the arrangement, hence the ruling application. Not sure what reason you could come up with in your circumstances.
Have you done the numbers on whether you can afford to hold the house and buy a new one? There will still be a lot of non deductible debt. Non deductible interest is very costly, you have to earn $1.50 or more to be able to pay $1 in non deductible interest. I attach a spreadsheet that will help you work out how much your current house will cost you to hold after tax. This will also help you realise what sort of properties make the best investments for tax purposes, maybe not this one. Though the cost of selling this house and buying another one probably out weigh all other considerations. It is a matter of doing the numbers.
Another point is the existing debt for the whole house. If your wife sells half the house then only half of that debt will be tax deductible debt.
Here is a link to a blog I would like you to read to ensure that this existing debt still has the necessary nexus with the purchase of the house. https://www.bantacs.com.au/Jblog/keeping-the-nexus-between-the-borrowing-and-the-expenditure/#more-352 If you have utilised a redraw facility on the loan it may have very little deductibility left.
If you are aiming to get tax deductible debt on the existing house then it is better to borrow for those bathroom renos and air conditioners.
Has this property always been covered by your wife’s main residence exemption? If not the transfer would trigger CGT. Note as a couple you are only entitled to one main residence exemption between you.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice
