Should I sell my IP to pay PPOR mortgage?

Discussion in 'Investment Strategy' started by Mark88, 14th Aug, 2017.

Join Australia's most dynamic and respected property investment community
  1. Mark88

    Mark88 Active Member

    Joined:
    1st Jul, 2015
    Posts:
    33
    Location:
    Sydney, NSW
    Hi everyone,
    Would appreciate some opinions on what would be the best thing to do.
    I am 29 and married with 2 kids (11 month old and 2 year old). My annual income is about 96k before tax and unlikely to go up significantly in the future. Wife doesn't work due to the kids.
    Our PPOR mortgage is 340k (property worth about 800k).
    When I was 19 I bought an investment property for 357k and in the current Sydney market it is worth about 700k. Current mortgage on the IP is 352k.
    I have calculated that if I sell IP then after agent selling fees and CGT then I could pay of most debt and only have a mortgage on PPOR of about 80k which we could pay of in about 4 years.
    So we would be mortgage free in 4 years and just before kids go to school - this would free up about $450 a week of what would have been mortgage money that we could use on school fees, holidays, savings etc.
    I'm torn between keeping the IP so my kids can inherit it vs selling it now to free funds to fund a better lifestyle.
    Appreciate any comments. Thanks in advance.
     
  2. Corey Batt

    Corey Batt Well-Known Member

    Joined:
    14th Jun, 2015
    Posts:
    2,091
    Location:
    Adelaide, SA
    Few options. You could potentially otherwise sell your property to another entity you could setup (e.g a trust), then that way you still hold the asset and then can pay down your PPOR debt. Then you would still have the cash flow from knocking your home loan off in four years which you could redirect towards the IP, other assets, lifestyle needs etc.

    Otherwise you could retain the IP and the PPOR and then use a debt recycling strategy using equities or property. With the amount of equity you have available in your PPOR you could get into the market in a pretty meaningful way and erode down your PPOR debt quickly, whilst still having your IP.

    It's pretty clear that reducing your PPOR debt, whilst having something for the future is important to you. The key is just balancing it so you can have both, instead of only having one of the other.
     
  3. Gockie

    Gockie Life is good ☺️ Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    14,720
    Location:
    Sydney
    Hi @Mark88, I'd second the debt recycling idea from Corey. I think it's good to own both the IP and the house, debt recycling (turning non deductible debt to deductible debt earning an income) is worth looking into.

    Personally I don't understand the trust idea.... @Corey Batt, can you perhaps explain further?

    And Mark, get onto the Propertychat forum if you aren't already. :)
    We have a Meetup at the Epping hotel on Thursday night if you happen to be in the area....
     
  4. Corey Batt

    Corey Batt Well-Known Member

    Joined:
    14th Jun, 2015
    Posts:
    2,091
    Location:
    Adelaide, SA
    Basically the OP can sell his asset to another entity that he owns - allowing him to gain those funds to pay his personal debt down, whilst leveraging up the investment again. Would have to pay stamp duties again, CGT - so they would need to get specific tax advice to weigh up the CGT and costs vs the tax effectiveness of being able to releverage the investment.
     
  5. Mark88

    Mark88 Active Member

    Joined:
    1st Jul, 2015
    Posts:
    33
    Location:
    Sydney, NSW
    Thanks for the replies so far.
    If I sell to a trust then CGT and stamp duty would be about 80-90k combined - not sure if the tax benefits would make this worthwhile?
    Thanks for suggesting debt recycling - it sounds interesting. How does one start doing this and who would be somoene that I can see in Sydney for information and advice?
    How risky is debt recycling?
     
  6. Corey Batt

    Corey Batt Well-Known Member

    Joined:
    14th Jun, 2015
    Posts:
    2,091
    Location:
    Adelaide, SA
    That's the weigh up of upfront tax costs vs long term that your accountant would have to weigh up to see the cost/benefit on your specific circumstances.

    Re; debt recycling - unsure who does this in Sydney - through our Financial Advice arm we have clients all over Australia so generally don't have to refer them to other firms.
     
  7. Gockie

    Gockie Life is good ☺️ Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    14,720
    Location:
    Sydney
    Debt recycling, get onto the Propertychat website and do a search. Basically, you can go to your bank that you have your PPOR with, get a line of credit, then use the line of credit to buy shares.
    Or, do a loan split with your PPOR, (we'll assume your PPOR has equity), and use the spilt to buy an IP.

    The benefits are, the purpose of the borrowed funds is for investment purposes, so it will be tax deductible. Then the income from the investment can go into the PPOR loan, decreasing non deficit blew debt. Then either get another split or increase the loc. buy another IP or buy more shares....

    Risk: Not risk free, but the shares or IPs should generally do well if you buy the right thing. Eg. Don't buy an IP in a mining town. Buy solid LICs. (Google that)
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,570
    Location:
    Australia wide
    I gave legal and tax advice to a client who did this.
    Sold a $1mil property, which was unencumbered, to a fixed unit trust.
    Mum and dad owned 50% each of the units of this trust.
    Mum and dad borrowed about $1.1 mil to buy the units in the trust and paid the trustee $1mil (rest stamp dutyand costs). The trust then paid $1.1mil to mum and dad who use the funds to pay off their non-deductible loan on their main residence.

    Net result was
    - no CGT (because former main residence)
    - land tax threshold (because individual unit holders of a fixed trust)
    - interest of abotu $50k per year deductible to the individuals - mum and dad
    - no more interest payable on the main residence.

    This was approved by the ATO - Part IVA not to apply and the OSR - land tax exemption available.
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,570
    Location:
    Australia wide
    In answer to your queston, consider this
    - how likely is it that the IP will grow in value in the future?

    If it is expected to increase then it may be worthwhile keeping it.

    Keep in mind that you can always sell it later, and compare any potential capital gains to the interest saved on paying out the main residence loan earlier.

    Also keep in mind that triggering CGT will mean you have less of your capital growing for you moving forward as a chunk will be gone with the tax.

    And, one more, keep in mind the tightening servicing. Could you get the same loans now if you sold?