Opinion
Can I use my mother-in-law’s home as an investment property?
Noel Whittaker
Money columnistIf I lend my mother-in-law $250,000 and take equity in her current home can I then use that as an investment property and get the tax break? I assume I would need to go to a solicitor and draw up an agreement, and specify a percentage of her current home. Maybe 20 per cent. Can this work?
When you use the term tax breaks, I assume you mean tax deductions for interest on a loan, and depreciation allowances on the property. To get interest as a tax deduction, you will need to have a loan to buy an interest in that property, and the property will have to be income-producing, which means your mother-in-law will have to be paying a market rent.
Loaning your mother-in-law money in exchange for equity in her home may not be the solution you’re looking for.Credit: Simon Letch
Given that the income tax rates change on July 1 and the 30 per cent marginal rate band will extend from $45,000 a year to $135,000 a year, any tax savings for somebody in that bracket would be minimal.
You’d be paying 70 per cent of the cost and 30 per cent would be the tax break. I can’t see this being a practical solution.
You have answered questions previously about the cap on the amount of superannuation that can be transferred from accumulation to pension mode. Does this limitation apply to the downsizer contribution that is available to those of a certain age who are selling the family home and moving into a smaller home? If one is in a position to make the permitted contribution of up to $300,000, is that amount exempt from the $1.9 million cap?
The downsizer contribution is a unique contribution in as much as it is exempt from the normal superannuation rules. It can be made irrespective of your age as long as you are over 55 and irrespective of your present superannuation balance.
This is why you need to think strategically when making a downsizer contribution, because you can only make it once in your lifetime. For example, if your super balance was $1.6 million, and you had money available to make a non-concessional contribution of $300,000, you should make that before the downsizer contribution.
If you made the downsizer contribution first you would’ve reached your $1.9 million limit, and could not make any further non-concessional contributions.
We are retired and both get a part aged pension. In 2015, we bought an investment property (in my husband’s name for tax purposes). The base cost was $515,000 including acquisition costs, and it was bought with a loan of $500,000. We believe the market value is $850,000, but Centrelink have assessed it at $867,000. This means we are now asset tested. We spent $100,000 on renovations, so the base cost is now $615,000.
In July 2016, our son and his partner became our tenants. To today’s date they have paid $168,000 in rent at $450 a week. We are currently updating our wills and intend to leave the property to our son. If my husband died in the immediate future, there would still be a debt of $440,000 on the property. Will our son be required to pay any capital gains on this property at any stage after inheriting the property?
I assume Centrelink is aware of the loan against the property because it should be deducted from the property value for asset test purposes as long as it’s secured by a mortgage of that property.
Death does not trigger capital gains tax (CGT), it passes the liability to the beneficiaries, who pay CGT only if and when they decide to sell the property. This should not be a problem if your son continues to live in the property – as time passes the CGT should reduce because it is adjusted for time on a pro rata basis.
My wife reaches her preservation age of 60 in January. I will be 67 then, and we are both retired and living off my superannuation pension. I would like to combine both our accounts in one account in her name. Are there any issues in doing this? Will the age difference affect the minimum withdrawal? I have $900,000 in super, and she has $300,000. We are debt free.
You can’t just merge your account into her account – you will need to make tax-free withdrawals from your account and then make contributions to her account. There are limits on non-concessional contributions, so I suggest you withdraw $110,000 from your super as soon as possible and make a contribution of $110,000 into her fund before June 30.
After June 30, when the caps increase to $120,000 a year, you can use the bring-forward rules and contribute a further $360,000 as non-concessional contributions. Having done that, no contributions can be made for another three years.
Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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