Join our investing community

Cleaning a Dirty Loan?

Discussion in 'Investing Strategies' started by Chomp, 26th Aug, 2007.

  1. Chomp

    Chomp Well-Known Member

    Joined:
    12th Jul, 2007
    Posts:
    61
    Location:
    wa
    Long time reader of SS and fairly new to this site, would just like to say that both sites have opened my eyes up considerably as to what is possible for me to achieve financially and would appreciate some advice, if any of you can, for the following scenrio.

    I bought a 2 bed unit in 2002 for $100k putting down a 40k deposit, I then studied for two years full time and had a fairly low paying job up until now, so I borrowed against the equity for personal use to make life a bit easier.

    As it stands now the Unit is worth around 330K and my total loan with line of credit is 130k, I dont have any other debts.

    The plan is to move out into a rental, (I love this suburb and houses are way too expensive for me to buy), rent the unit out and then either buy an IP or MF not sure which way to go yet Perth market maybe flat for a while and I dont really feel comfortable buying interstate.

    I would probably get $250 a week for my unit but how would this effect my tax return at the end of the year if I left everything as is?

    There are probably a few other concerns that I am not aware of so I would appreciate it if anyone could give me some pointers?

    Regards
    Chomp
     
  2. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    There are a number of different ways to do this and I will leave that to others, I cannot give financial advice.

    BUT you must calculate or sit down with your Accountant and work out what portion of principle currently represents costs of acquisition of the house and what part represents costs of private consumption.

    I presume you initially had a $60k P&I loan. You will need the interest rates for each payment to work out any principle repaid each time to reduce this amount oustanding.

    Also, you will need to add any additional borrowings for house improvements at the correct time for amortising.

    Then this is the outstanding loan principle for house acquisition.

    Generally, most people would refinance this portion plus any other house expenses as an interest only loan and quarantine it from any drawings for private consumption. Then the interest is deductible on this part when it becomes a rental property.

    Don't forget valuations of building & fixtures for depreciation deductions.

    Cheers,

    Rob
     
  3. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    I forgot to mention, if your loan has been compounding due to capitalised interest then in my opinion the ATO will regard this as NOT part of the loan cost of acquiring the house as the interest expense is for private use.

    Remember, interest expense is only deductible while a rental property, and the same goes for compound interest. The ATO could argue that your choice to not pay the interest due is a private expense just like a redraw of the original loan for private use.

    Check this out with your Accountant to be sure.

    It is critical to establish the true cost to you of acquiring/improving the property or else the loan will remain tainted.

    Cheers,

    Rob
     
  4. Chomp

    Chomp Well-Known Member

    Joined:
    12th Jul, 2007
    Posts:
    61
    Location:
    wa
    Thanks alot for your reply Rob, you do presume right, I managed to burn up 70k in a few years but well worth it now.

    I have managed to keep all the receipts and bank statements which should be fun going through, I did spend around 15K on renovations mainly materials etc. I dont think my time spent is deductable though.

    Maybe I should have posted this in the accounting section, but I am after a strategy. Would anyone recommend selling the place to a family trust I have set up? Or to make it a bit more simpler / cheaper to set up in the long run loan wise?

    Any more suggestions would be helpful. Bit out of my depth.

    While I'm at it could anyone recommend a good accountant in perth who is involved with IP's & MF's maybe save some headaches.

    Regards
    Chomp
     
  5. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    Receipts for work done to the house will not be deductible. But to the extent it is represented as part of the loan principle then it may be argued to be part of the costs of getting the house into a condition for renting and so the interest might be deductible when you start renting.

    Can't you live with relatives rent-free while renting out your house ? The rent you pay is from after-tax money and yet you will be taxed on your rental income. Also, if you rent your house for more than 6 years then you will start to lose your CGT main residence exemption pro rata. Alternatively, keep living in it rent-free but borrow against the equity to make investments. You need to do the calculations for your situation.

    Why do you need to put your assets into a trust ? Is it because you have a rsky occupation or estate planning issues ? Again, you will lose the CGT main residence exemption as well as increased costs. Alternatively gift money to a trust and it can loan back with a mortgage against your house to protect it - but not so easy borrowing against encumbered property.

    I think you really need to pay for some financial & tax advice before acting as no one strategy can satisfy all possible requirements and you need to prioritise your objectives as well as sort out a budget.

    Cheers,

    Rob
     
  6. Chomp

    Chomp Well-Known Member

    Joined:
    12th Jul, 2007
    Posts:
    61
    Location:
    wa
    Ok Rob so I may still get some mileage out of those receipts yet it would seem fair to me of course.

    I couldnt move in with relatives or friends anymore too hard basket, I will rent out a room to a student etc to offset some of the cost though.

    I dont need to use the trust really, I have one set up which was going to be used for buying and then renovating properties but it fell through because of a back injury. So its just sitting there doing nothing.


    I think you are right, I will have to get some face to face, well paid for advice and think about how much I can afford to put aside in the future.

    Thanks alot for your time and direction.

    Regards
    Chomp
     
  7. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
    717
    Location:
    Melbourne, VIC
    Chomp,

    I only just re-read your response properly.

    I would consider the CGT consequences of merely renting out part of your house while you still occupy it. You might lose pro-rata the CGT main residence exemption on that part exclusively rented plus part of the shared property access. It depends on how you do it.

    You can vacate and exclusively rent it for up to six years and nominate it as your main residence. You can re-occupy it and start over later without any loss of CGT concessions.

    Again, get some advice. See if you can squeeze a bit of extra info out of your Accountant as he does your tax returns as it is that time of year ?

    Cheers,

    Rob
     
  8. Sk3tChY

    Sk3tChY Well-Known Member

    Joined:
    4th Aug, 2007
    Posts:
    358
    Location:
    Sydney, NSW
    May I ask, where on earth did you find a 2br unit for $100k..?!?!

    And the unit is now worth $330k only 5 years later..?!?!
     
  9. Chomp

    Chomp Well-Known Member

    Joined:
    12th Jul, 2007
    Posts:
    61
    Location:
    wa
    Mount Lawley 6050