Break Fee's on Re-finance for Trade - finance costs ?

[Bluekiwi]

Okay here is something I think is a little bit tricky.

In setting up finance to do a purchase in my Trading entity.
I had to re-finance with another bank.

And my Trading Trust is using Rental Trust equity as security to buy a trade.

As well as having a R/C facility through another bank, lent again against the Rental Trust properties.

The creation of the R/C facility required me to move banks and I have suffered about 5k of break fee's as well as incured about 1,500k of solicitor fee's.
Although the new bank has also credited 1k legal fee's as well.

Can I treat the break fees incured in the Rental Trust, and solicitor fee's for the refinance, as finance costs for the deal the Trading Trust is doing.

I doubt I have made this clear.
Ask me for clairification on any points.

The total cost of doing this was about 8.5k and some of this is Rental Trust interest.
This was paid out of my R/C to the Trading Trust which I know I will have to sort out in due course.

[buxlo122]

It is confusing following the trail of loans in your description.

The deductibility of the break fees depends on the original purpose of the loan.

If the break fee is in your trading trust it would be considered a cost of doing business and would be deductible.

If the break fee is in your rental trust it will considered a capital expense and will need to be capitalised.

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You may be able to do some inter-trust invoicing for the finance costs of the loan. This could get the costs out of the rental trust and into the trading cost where they would be deductible.
To justify the on charging of the finance cost it would probably mean paying interest from one trust to another. This could bring about RWT issues as well.

To do this you would need to get an accountant to have a look at and make sure everything is done correctly.

[WGN ex-property manager]

I think I'm confused, but I know I don't know the answer.

[buxlo122]

Side Note to my above post:

Break Fees are deductible for cash basis persons.

[CJ]

I doubt I have made this clear.
Ask me for clairification on any points.

Start again.

Describe each entity in isolation.

My interpretation is:
Rental Trust
Had loan of $x with bank A
Refinanced with Bank B. Incured break fee of $y

Break fee should be deductible

Trading trust
New R/C account with bank B

[Bluekiwi]

My interpretation is:
Rental Trust
Had loan of $x with bank A
Refinanced with Bank B. Incured break fee of $y

Break fee should be deductible

Trading trust
New R/C account with bank B

Yes, BUT
Break fee was incured in setting up finance for Trading Trust.
So break fee is a cost of the Trading Trust ?

AS, the only reason I re-financed with Bank B was to get the Trading Trust R/C as Bank A wouldnt come to the party.
Otherwise the break fee cost would not have been incured.

[CJ]

Did the rental trust continue to have a loan, just with a new bank?

I still think you need to look at it on an entity by entity basis in which case, it is the rental trust incurring the cost to break its mortgage.

[Bluekiwi]

Did the rental trust continue to have a loan, just with a new bank?

I still think you need to look at it on an entity by entity basis in which case, it is the rental trust incurring the cost to break its mortgage.

Yes the rental trust continues with the loan.
But the new R/C for the Trading Trust got hit with the 8.5k settlement bill.

Which was a mix of:
Solicitor Fee's
Break Fee's
Interest up to settlement date

Now I just want to move the funds back to where they should lie.

The other 2 are clear cut.
But the break fee's I thought I could put in the Trading Trust.

But not a biggie, as the cost will be picked up by the Rental Trust.

[Rosco]

Hi Blue Kiwi,

The break fees may not be deductible to the rental trust!

So I would look at setting up proper, arms length relationship between rental and trading trusts.

So a loan document for any funds advanced from rental to Trading, showing interest rate etc charged, term etc. This should also include something about the break fees being on chargeable.

Then a simple invoice from rental trust to trading trust, charging the break fees to it.

So left with rental trust, expense out for break fees offset by income in.

Trading trust left with break fee cost.

If you are not charging interest to trading trust, then quick thoughts is that there is no deduction for break fees, as no relationship to income earned.

Ross