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Re: Parents are paying back a loan - do we pay tax?

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Twelve years ago we sold our house to my parents. My parents could not afford to pay what it was worth - we agreed via a deed contract to break the payment in two parts. My parents paid $350k cash and the remaining $100k was calculated as 22% of the value of the house. We therefore sunk our life savings into their property with the view that once they die we receive 22% of the value of the house. My parents have now decided to sell the property - would we have to pay tax on this? We have not earned any interest on this at all.

 

 

 

 

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Taxicorn

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If you sold your principal place of residence then no matter how you are paid you should not have to pay tax on any of it.

Unless the title was changed to Tenants in common with your parents at 78% and you & your spouse at 22%

 

 

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Champion

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Hi DM21,

 

Without reading the "deed contract" I can't state for certain, but sounds like you sold the house for $450k, with $350k paid now and $100k paid later. If you eventually receive more than $100k, then that difference will be seen as additional profits.

 

The key will be whether it is seen as "interest" (amounts added after sale), or "capital proceeds" (i.e. increase in sale price).

 

It's a complicated scenario and will probably hinge on the exact wording of the deed contract. Go and make an appointment with your tax agent and get it looked at.

Best answer

Taxicorn

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If you sold your principal place of residence then no matter how you are paid you should not have to pay tax on any of it.

Unless the title was changed to Tenants in common with your parents at 78% and you & your spouse at 22%

 

 

Initiate

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Thanks MCA_Accountants I appreciate your feedback.

 

The $100k difference was because they couldn't afford the house at the time, they could only afford $350k cash hence we let them have it for that providing they paid us the remainder of what it was worth out of the proceeds of the house once it sold after they pass. This was the only way they could afford it. Apart from legal advice we also sought advice from an Accountant at that time who advised that they include reference to the deed making provision in their will in order that this loan would be returned to us as part of the deceased estate. This has turned out differently as they now want to move overseas as opposed to selling the house after they have passed.

 

This was not an interest payment it was part of what the house was worth and a loan as part of what we sold it to them for. There has never been any interest earned and neither will there be once sold as the amount stated was a percentage of what the house was worth therefore any increase earned is as a result of house evaluation increase. Had we sold it to a  *stranger* via a normal house sale process (where full cash exchanged hands) then this full amount would have been used as a downpayment on our next property as a result of having to move.

 

The other consideration is that over all these years since we sold it to them we paid higher interest rates on any new subsequent property due to having to borrow more as we had less downpayment.Indeed we paid an Insurance indemnity to the bank as we didn't have 20% deposit on our next home at the time.

 

Since this has occured I have become disabled and unable to work which is why I thought I'd ask on here first as to help understand the implications.

 

Thanks again for your response - I hope this has given more clarity to the situation. 

 

 

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Initiate

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Thanks macfanboy I really appreciate your help.

 

It was our primary principal place of residence and what you have said is exactly what the Accountant said at that time i.e we shouldn't pay tax on it because of that.

 

The title was not changed to Tennants in common, they in effect owned the house only we had 22% interest in it as part of what they owed us. The Deed they signed was in recognition of this arrangement and that they would repay the loan if ever the house was sold for whatever reason.

 

Thanks again for your help macfanboy it has been much appreciated. 

 

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