Inheritance of Property - Investment Loan

i like coffee on 26/08/2021 - 17:10
Last edited 26/08/2021 - 17:45

One of my parents passed away and they owned a 2 bedroom apartment in Melbourne. Having to deal with a demanding tenant (via a property manager) is not something the surviving parent wants to do, so they were considering selling the apartment.
I don't think it's a good time to be selling an apartment, even if it's in a good location, so I encouraged them to hold onto it and offered to take over the property management.
Rather than receive inheritance in cash, I've been offered the property as a gift (that the parent will need to pay CGT on). So they will be gifting me an asset of ~500k.

I currently have just purchased a home in Melbourne (and still owe a large amount on the loan e.g. $1Mil). Is it possible for me to take an investment loan (e.g. $500k) and instead of transferring the money to my parent, putting that money into my home loan?

I'm fortunate to have a job and would like to reduce the amount of tax I'm paying, so having an investment loan was suggested.

So the scenario would be:
I currently have a home loan, balance -$1Mil.

I want to take an investment loan of $500k.
If I'm gifted the property, I'd have to pay stamp duty -$25k. Leaving $475k, with a balance on the investment loan of -$500k.
I want to use the remaining $475k to reduce the amount owing on my home loan.
Leaving a balance of the investment loan of -$500k & a balance of the home loan of -$525k.
Typically the investment loan money would be transferred to the person selling the property. However the surviving parent is gifting me the property.

Financial

Comments

  • tsunamisurfer on 26/08/2021 - 17:21
    +1

    So they will be gifting me an asset of ~500k.

    Is it possible for me to take an investment loan (e.g. $500k) and instead of transferring the money to my parent, putting that money into my home loan?

    If they are gifting you the property, why is there a need to transfer any money to your parent?

    • i like coffee on 26/08/2021 - 17:26

      Sorry the scenario I explained may not have been clear. I've updated with more details.

  • Pecan on 26/08/2021 - 17:30
    +1

    There’s stamp duty to be paid by you as well, don’t forget.

    • i like coffee on 26/08/2021 - 17:42

      thank you, looks like stamp duty will be ~$25k

  • Willco88 on 26/08/2021 - 17:38
    +1

    Don't forget all the rates, land rates, all the costs of maintenance if any issues…

    • i like coffee on 26/08/2021 - 17:51

      Thank you, yes I'll need to budget for this annually. Maybe $10k set aside.

  • caramellokoala on 26/08/2021 - 17:44

    I'm sorry this just sounds like you have no idea what your doing. Or at best shuffling the deck chairs.

    There are two simple options based of what is actually happening

    A) the parent is actually gifting the property. Then there is no loan required.

    B) The parent wants compensation to for the property. Then you need to go to the bank and ask for an investment loan on top of your home-loan. Your total borrowings will be $1.5 mil

    • i like coffee on 26/08/2021 - 17:49

      You are correct that I have below average financial intelligence.

      Scenario A) is correct. There is no need for the investment loan. However there is a desire for it because I want to obtain the tax benefits.

      I'm trying to do scenario B) taking an investment loan, on top of my personal home loan, but instead of giving the money to the sole surviving parent, I use it to pay back my home loan.

  • TNTomer on 26/08/2021 - 17:45
    -1

    Yes, from what I understand you want to take out a new loan on the equity of the new apartment you will own and use that loan to pay off some of your principle place of residence loan. This is commonly done because the interest paid on the investment loan is claimable as a tax write off while it is not for principle place of residence.

    Just really depends if you can find a bank that will let you take out a total of $1.5m worth of loans. A broker may be able to help you by organizing some sort of combination loan through a refinance.

    • MrHyde on 26/08/2021 - 18:07
      +19

      This is incorrect.

      Interest paid on a loan is tax deductible when the loan is used for investment purposes.

      If you are being gifted the property, you are not taking out a loan to purchase it. You can take out equity after you've got the property. But if you use that to pay off your home loan, then that is not counted as being for investment purpose, so not tax deductible.

      • sghetti on 27/08/2021 - 07:29
        +1

        A far as I’m aware the banks will generally want to work with a conveyancer for the loan process, when they find out they’re paying the loan balance to the same client in to a bank account, rather than paying to another party, with no property sale contract or anything… I’d say the bank is going to ask a lot of questions

  • kingsville on 26/08/2021 - 17:50
    +4

    Can you talk to a bank about buying the property and that this requires an investment loan of $500k.
    Then you buy it from your parent.
    In a completely unrelated issue, they happen to gift you $500k that you then stick in your offset account…

    Critically, you are purchasing the property. And maybe choose an investment loan value to avoid LMI.

    • i like coffee on 26/08/2021 - 17:55

      That is the scenario that I want to do. However, I'd like to minimise the CGT that they need to pay.
      I'm also unsure of the rules around gifting large amounts of money.

      • kingsville on 26/08/2021 - 17:59
        +1

        As far as I'm aware, gifting isn't a problem unless they are on a govt pension.

        You may want to ensure that the gift of cash is not exactly equal to the payment for the property.

        If you check the rates notice it may provide a value of the property that is seen as reasonable and yet at the lower end of 'fair value', to minimise CGT.

      • JIMB0 on 26/08/2021 - 18:40
        +1

        The government is going to get a large chunk of money no mater what you do.

        • i like coffee on 28/08/2021 - 10:09

          Unfortunately this seems to be the cost of transferring ownership.. unless it's done as inheritance when the surviving parent passes.
          Ideally I'd like to avoid paying large sums of money in taxes but as others have pointed out my financial IQ is below average.

  • pharkurnell on 26/08/2021 - 17:54
    +1

    They are gifting it to you, but you have to pay for it ????

    Am I missing something here?

    • i like coffee on 26/08/2021 - 17:56

      They are gifting it to me.
      I don't have to take an investment loan. I want to take an investment loan so that my debt is split between an investment loan and a personal home loan.

  • MeesusEff on 26/08/2021 - 18:14
    +1

    I don't get it, if you take out a $500k loan on IO, you will still need to pay off that loan but at a higher rate. So $1 Mil at ppor rate or $500k IO + $500k PPOR. Or am I missing something here

    • i like coffee on 26/08/2021 - 19:52

      You're right that the total amount of debt is the same.
      However a PPOR has a lower interest rate & isn't something that you can claim back on tax.
      An investment loan has a higher interest rate but it's tax deductible.

      • MeesusEff on 26/08/2021 - 20:22

        Ah true. Goes to show how useless my commerce degree is 😂

        • vinnychase on 26/08/2021 - 21:07

          UOW?

        • SlickMick on 27/08/2021 - 12:41

          No, you were right. There is no tax deduction available on a loan used to pay off PPOR loan. This is a terrible idea.

          • i like coffee on 28/08/2021 - 10:06
            -1

            @SlickMick: The investment loan would be used to pay for the value of the investment property ~$500k.
            The inheritance gift of money would be equivalent to the same value and used to pay off the PPOR loan $500k.

            • SlickMick on 28/08/2021 - 11:52

              @i like coffee: That's not what your original post says.

              Now you have to add tax on the gift of cash on top of CGT and stamp duty.

              • i like coffee on 28/08/2021 - 15:24

                @SlickMick: We don't have a gift tax in Australia.

                CGT & stamp duty are unavoidable when transferring property, unless it was part of the will of my sole surviving parent.

                I'd much rather them remain alive and I pay some tax.

  • woodg on 26/08/2021 - 18:20
    +7

    The tax treatment of the loan is based on the use of the loan. If you take a $500 k loan against the apartment and use that money to buy another investment (I.e. property, shares, etc) then the interest on the loan will be a tax deduction. However if you use the loan to reduce the mortgage on your house, then it is not tax deductible.

  • Devils Advocate on 26/08/2021 - 18:24
    +3

    Not financial advice

    What if you bought the property from your parent with an investment loan, using the equity in your home?

    Your parent could then gift the $500k to you in cash, which you could use to pay down your mortgage. If you have borrowing power of $1.5m that might work.

    I'd highly encourage you to talk to a real financial advisor, there is so many ways this could go wrong.

    • i like coffee on 27/08/2021 - 19:08

      Thank you, this is what I was thinking before they decided to gift me the property.
      Take an investment loan to purchase the property. The surviving parent would receive $500k - CGT & other fees.
      The surviving parent would gift me the value back ~$475k.
      If this money earns any interest, then I'd need to pay tax on that. But if I'm using to pay down my PPOR loan, it should be ok.
      I need to understand what receiving the money from the sale of the property means for the surviving parent.

  • screensaver on 26/08/2021 - 18:29
    +1

    I donr see how you can get an investment loan on something that is not being rented out, You would have to not sell it but use it as security for another property to get an investment loan on and rent out and keep your home lloan out of it

  • screensaver on 26/08/2021 - 18:38

    Dont sell it but use the rent to help pay off your loan, Any expenses incurred in running the property are tax deductible, maybe even the stamp duty? The ideal situation is a home plus income

  • rmw on 26/08/2021 - 19:08
    +2

    Leave property in parents name and you manage it. If you receive property as inheritance no CGT paid by your parent by them selling to you and you will not pay stamp when it transfers to you - if you buy or receive as gift you pay stamp, avoid this.

    Keep in mind any pension eligibility of parent - anything they gift to you still counts for 5 years for assets tests in case this was a motivation behind gifting.

  • screensaver on 26/08/2021 - 19:11

    Yes you can claim stamp duty and other costs back, but only when you sell. You can also claim depreciation

    https://www.mortgagechoice.com.au/guides/property-investment…

  • cjbowden on 26/08/2021 - 19:32
    +1

    You really need to talk to your accountant. However:

    ** Not Financial Advice **

    As mentioned by someone earlier, you can't borrow money for something you already own (the gifted house) and then claim interest on the borrowings.

    If however, you borrow money and buy the house from your parents, that is a valid investment and interest can be deducted. The fact your parents then gift you the $500K you paid them is not relevant from your taxation perspective.

    Couple of things to watch out for:

    1. Stamp Duty and CGT will be calculated on the market value, not the dodgy price you agree to 'pay'. They can always come at you a year later and demand more CGT and stamp duty if the price was unrealistically low.
    2. As mentioned earlier, you will need to find someone to lend you ANOTHER $500K, however your total borrowings will drop down to the previous level once your parents gifted you the cash
    3. There may be implications on your parent with regards to pensions etc, so make sure you consider that (more importantly make sure they have considered that)

    Good luck!

    • Indomietable on 27/08/2021 - 13:46

      Another thing to watch out for is that lenders generally classify city apartments as high risk investment. This might have negative impact when refinancing.

      • i like coffee on 28/08/2021 - 10:02

        Thank you. Definitely with the pandemic and low vacancy rates, it would be considered high risk even if we can show that it's been continuously rented. It's likely to be a headache getting an investment loan and the bank may want to consider the apartment as having a high vacancy rate.

    • i like coffee on 28/08/2021 - 10:00

      Thank you. My preference originally was to take an investment loan to purchase the property, transfer the value of the property to the surviving parent (via a solicitor/conveyancer).
      Then if they choose to gift money as inheritance that will be a separate transaction.

      1) the property value will be determined by a property valuer. I did a free online property evaluation (via NAB) but the range provided has low confidence. Another option I considered was to look at the land tax. I don't see the point in using a dodgy price as it would likely cause more problems later when it's picked up on. However apartments have taken a blood bath due to the high vacancy rates and large amount of new buildings being constructed.

      2) servicing the loan won't be a problem, however banks have likely tightened their criteria given the pandemic and they would likely consider an apartment a high risk investment, given the low vacancy rates. I'll need to factor this in when organising the loan as it's likely to be a headache. It might be better to receive the $500k inheritance prior to this, to mitigate this.

      3) I'll need to find out what this means for their financial situation. I don't think they have a pension.

  • serpserpserp on 26/08/2021 - 22:41
    +1
    1. Keep the property in your parents name, you manage it for them and give them the income generated.
    2. You get the property when they pass away. Or agree to sell in a couple of years when that apartment market recovers.

    Seems like a win win for everyone.

    • Indomietable on 27/08/2021 - 13:36
      +1

      I would definitely do this ! I think OP wants to use this opportunity to reduce his taxable income and reduce his mortgage on his PPOR at the same time, which I think not really feasible.

      • i like coffee on 28/08/2021 - 09:42
        +1

        I offered to manage the property for the surviving parent when it appeared stressful for them.
        However they prefer to start distributing some of the inheritance now so it's one less thing to do in the future.
        You're correct, given the apartment is an investment property, I'd like to use the opportunity to take an investment loan and use the costs associated with the property/loan to offset my income tax.
        If I purchase the property, transferring $500k to the surviving parent, I need to understand what this means for their situation.
        They plan to gift me back the money, which I understand is OK in Australia. However, if the money earns any interest I'll need to pay tax on that.

  • MrBear on 27/08/2021 - 16:08

    I don't think it's a good time to be selling an apartment

    Isn't it a really good time right now when prices are up?

    Get them to sell it and use their capital how they want and wait for your inheritance like a good child.

    • Indomietable on 27/08/2021 - 17:35

      City apartment is taking blood bath right now. Too many stocks no demand. In almost every building you'll see a bunch of listing where 1 apartment is pretty much the same to the next, so its just a matter of which vendor will offer the lowest price. We also have thousands of new Appartement nearing its completion.

Login or Join to leave a comment
Login Join