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  • LOC on PPOR in Trust?

    I am currently in the process of finalising the sale of my principal place of residence (PPOR) into our family trust.

    I currently have a line of credit (LOC) facility secured against my house and have my salary paid directly into this to reduce interest payments, use credit card for everything possible and then pay off the balance monthly from the LOC.

    My solicitor has advised me I will no longer be able to do this as the house is owned by the trust.

    Does anyone have a solution to this? ie. Pay personal salary to LOC secured against property owned by a trust?
    We Buy Houses | Sell Your House Fast - No Fees, No Stress

  • #2
    Difficult to answer your questions due to lack of information so have made a few assumptions.

    Who is the Settlor to the Trust?
    Who are the Trustees?
    Who are the beneficiaries?

    Is the L O C in your name,
    trust name,
    Company name (L A Q C?)

    If your L O C is in your name, irrespective of original purpose, you are gradually converting it to a private loan.

    What was the L O C originally used for?

    Who owns your rentals? - Trust, Company , Personal?

    But there is no reason you cannot borrow funds for a business and have the loan secured against an asset owned by a Trust.

    After all, the purpose of the Trust is to assist the beneficiaries.

    Probably need the L O C in a company, then the interest is always deductable so long as the shareholder loan accounts are not overdrawn.

    I am afraid nothing is as simple as we would like.

    As a Chartered Accountant, this question illistrates the sorts of issues faced every day and how with inadequate info, it is so easy to get it wrong.

    It is best to talk to your accountant before restructuring and know what your objectives are now and in the future so the restructuring and refinancing achieves your goals.

    Interview your lawyer and accountant to ensure they know and understand property and don't expect your lawyer to be on top of the various tax issues as they often are coming from a different direction.

    I hope this helps.

    J B (Mick) Lloyd
    J B Lloyd Chartered Accountants Limited
    Mount Maunganui

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    • #3
      Hi,

      We have the same as you, except that the Trust also has a fixed rate mortgage on the PPOR in its own 'name'.

      Typically, although the PPOR is 'owned' by the Trust, it, in fact, owes the Settlors a good deal of money for the purchase, which is typically offset using a gifting programme.

      The settlor is in fact responsible for paying the mortgages, and so it he/she/they decide to do so using a LOC, I don't see a problem, so long as the Trust owes the settlor more money than is in the LOC.

      Once the gifting starts to eat away at the debt to the settlor, things may get more complicated, but only in that the Trust will need to document in some way that it is allowing so-and-so to use the property as collateral for a loan.

      But then I'm just a simple member of the public, not an accountant, lawyer, tax advisor, tax investigator, auditor......... the list of opinions is endless!

      cube
      DFTBA

      Comment


      • #4
        Thanks, Cube & Mick. I understand that now.

        In response to Mick's questions:

        Who is the Settlor to the Trust?
        Who are the Trustees?
        Who are the beneficiaries?
        My wife and I are the Settlors.
        My wife, myself are trustees along with an independent trustee.
        Beneficiaries are my wife, myself and kids.

        Is the L O C in your name,
        trust name,
        Company name (L A Q C?)
        L O C currently in mine and wife's names.

        What was the L O C originally used for?
        Used to have a floating part of mortgage on PPOR I can pay off quicker than the fixed one.

        Who owns your rentals? - Trust, Company , Personal?
        Rentals owned by LAQC - 999 shares me (high income), 1 share my wife (no income)

        Probably need the L O C in a company, then the interest is always deductable so long as the shareholder loan accounts are not overdrawn.
        Are you saying the interest on mortgage on PPOR can be tax deductable?

        Thanks again for replies,

        Cliffy
        We Buy Houses | Sell Your House Fast - No Fees, No Stress

        Comment


        • #5
          Hi Cliffy

          You have a problem as the revolving credit is in your personal name as the test of business or private exists for all transactions.

          All debt should have been in your L A Q C and then it is tax deductible subject to the shareholder loan accounts as these cannot be overdrawn.

          The fact you set up, manage and benefit from the Trust is okay but keep the paperwork up to date and involve the independent in the Trust operation.

          The scenario I generally use when explaining Trust management is you need to have multiple personalities when operating the Trust so the Trustee is not aware they are a beneficiary, but are able to stand back to provide the best resources to the beneficiaries.

          As your Trust is not a trading entity, you cannot claim operating and debt servicing costs incurred in the name of the Trust.

          Talk to your accountant and co-trustee about restructuring your debt

          Hope that helps

          J B (Mick) Lloyd
          J B Lloyd Chartered Accountants Limited
          Mount Maunganui

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