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Financing a new PPOR

Discussion in 'Real Estate' started by jenpalex, 26th Oct, 2006.

  1. jenpalex

    jenpalex Active Member

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    I have a property financing problem I am trying to think through and would appreciate Investeders' contributions.

    We own our house in Canberra, worth about $450K; investment property worth about $980K (fetching $740/wk), all geared to the 80% level and approx $1M in Navrainvest, 50% geared.

    We have seen a house we would like to buy which we think will go for $600K+.
    We would like to keep our present residence as a rental property fetching about $380/wk. But if we do that our repayments on the new property will be non-deductible and therefore beyond our means.

    Is there any way of avoiding the non-deductible debt? Renting out the new property for a while and/or deferring settlement may be possible.

    Paul Mason
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    If you live in the property you own, your interest payments will not be deductible.

    About the only way to get around it that I am aware of, is to instead rent it from your trust (not a unit trust), being careful to get some good advice from your accountant / tax advisor first !!

    Of course, this only means that the interest becomes deductible to your trust, and not to you personally ... no negative gearing benefits there.
     
  3. TryHard

    TryHard Well-Known Member

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    Hi Paul

    We faced a similar situation, I think.

    We sold our PPOR to our (HDT, for negative gearing purposes) Trust at market value with a 105% loan, making all the debt deductible (but we moved out and rented it to a 3rd party). The only major downside is the stamp duty hit (funded by the loan) but we saw the benfit as retaining the likely capital growth from a property that we knew was solid and well-maintained, in a good area.

    This freed up some cash to put toward the new purchase (which became the PPOR) which would otherwise have been a stretch using non-deductible debt.

    I think Sim's comment about getting some very strong advice, if you intend to personally rent from your own Trust, would be very relevant - from what I've read that's 'red flag to a bull' material. We were very careful to be openly accountable, all proper paperwork and professional valuations etc, because skipping any detail would possibly be seen as 'avoidance' and I'm way too pretty to go to jail :D

    Cheers
    Carl
     
  4. handyandy

    handyandy Well-Known Member

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    Hi Paul

    Cash in the Navra funds. That way you now have $500k of your own money that you can use to buy the PPDOR you can subsequently regear and pull out $400k to put back into Navra.

    In this way you will have only $200k non deductable.

    Obviously doing this will impact your servicibility but you will need to do those figures as there is not enough info to determine from where I am sitting;)

    Cheers
     
  5. Leandro

    Leandro Well-Known Member

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    As suggested by handyandy, the only standard way to not have the non-deductible debt is to pay for the house with your own money. But this method doesn't make the debt deductible, just removes the debt. As for more creative methods, i'm all ears to anyone with ideas.

    Why did you need to sell the PPOR to the HDT to maintain the CG? If you moved out of your PPOR and made it an IP, then your CG would still be intact. What am i missing?
     
  6. TryHard

    TryHard Well-Known Member

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    Oh yeah - thats a simpler answer ! I didn't see the wood for the trees ... :p
     
  7. TryHard

    TryHard Well-Known Member

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    I explained that badly. Our choice was to :

    1. simply move out and use the old PPOR as an IP, but we had paid out the loan, therefore no negative gearing or

    2. Alternatively we could sell in a not-ideal market, and buy something else later, but we knew this was a solid property with good CG potential.

    So the choice was sell and lose the future CG, or keep and have no neg gearing benefit, or sell to the HDT and get the future CG and the neg gearing benefit, legally

    Am I explaining properly ? :p
     
  8. Leandro

    Leandro Well-Known Member

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    Yep i get that. I also plan to eventually move out of the PPOR which i just purchased and make it an IP, which is why i made the loan IO with an offset account.

    In relation to this situation and sim's earlier post on the trust now having deductable interest. Does this deductable interest benefit the trust, because the trust is producing income elsewhere i.e. managed funds or positive cashflow ips?
     
  9. TryHard

    TryHard Well-Known Member

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    Good idea - we didn't have that foresight unfortunately, nor did we expect the CG we got ... we live and learn :)
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, that's how it works. The trust can claim the interest on loans it takes out to buy assets and offset that and other expenses against income that the trust earns from its investments.

    The trick is that if the trust isn't cashflow positive overall (ie the interest and other costs are greater than the total income earned), then there will be losses accumulating in the fund which you won't get any immediate value from - you carry the losses forward until future years when you do make income, at which time you get to offset that income.

    So you don't get the same immediate benefits that you get with negative gearing, where you offset those losses against your personal income, thus reducing your tax bill.

    In my personal case, my trust is now cashflow positive (from both rental income, plus managed fund income), so it's not an issue to me.

    Note that I'm referring to ordinary discretionary trusts here ... hybrid trusts do make more things possible, but also complicate things somewhat. I'm not qualified or experienced enough to comment on what might be possible with a hybrid trust.
     
  11. Leandro

    Leandro Well-Known Member

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    Well, i have learnt such things right here on SS from posters like yourself, and was able to implement it because of a good broker (Rolf L).
     
  12. Leandro

    Leandro Well-Known Member

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    Thanks Sim. I will have to re-read Dale's books on trusts again soon to refresh my memory as i believe i will set one up before next IP purchase.
     
  13. jenpalex

    jenpalex Active Member

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    The Navrainvest units are virtually all funded by ML and increased equity drawn from the properties. We haven't had most of our investment in NI for very long. Consequently nett equity is only about $70K. If I ran down the NI units wouldn't I effectively be using loan funds initially borrowed "for investment purposes" to finance a PPOR?

    Paul
     
  14. TryHard

    TryHard Well-Known Member

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    I'm not qualified to comment either, but we have 2 HDT's and the interest expense is indeed deductible (for the individual who borrowed to purchase units in the Trust). So our HDT's are currently negative cashflow, but we gain the negative gearing benefits. NickM's the best bloke to talk to, to sort the details out ... I'm not sure how much more or less complicated a HDT is versus a more 'normal' discretionary Trust - Nick handles most of the paperwork and I think the accounting costs, given the benefits, are pretty reasonable. At the end of the day its just a Trust Deed with some terms that you need to operate within, and account for at tax time - to my dummy way of thinking its pretty simple. Provided you get the right advice in the first place.... :cool: (again, NickM)

    Cheers
    Carl
     
  15. TryHard

    TryHard Well-Known Member

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    We use Guru Rolf too :D Unfortunately even Rolf can't anticipate a wife who changes her mind about where she wants to live ;) (I guess I count myself lucky I was still invited to live in the new place) :rolleyes:
     
  16. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The main reason I mentioned the "complication" is for the situation where you are living in the property in question, and it is effectively held by a unit trust (as opposed to a discretionary trust). You want to make sure you get very good advice about whether there are any taxation implications in this situation.

    Living in a property while also claiming negative gearing benefits on that same property is starting to smell very much like tax avoidance.
     
  17. TryHard

    TryHard Well-Known Member

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    Yep - that's why I mentioned it before -

    ... we moved out of our previous PPOR which became an IP rented to an unrelated party, and the negative gearing benefits are only claimed on a valid straight-up-and-down rental.

    Common sense would suggest that the ATO would perform a rectal examination on anyone renting a property from an entity they control. I agree with you - I'd be getting very detailed advice before going down that path

    :cool:
     
  18. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I wouldn't go quite that far :eek: :D

    ... a discretionary trust which quarantines losses, hence no negative gearing benefits, I consider to be okay, provided everything is done as much as possible at arms-length and at market prices.
     
  19. Leandro

    Leandro Well-Known Member

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    That's the spirit! :D
     
  20. handyandy

    handyandy Well-Known Member

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    duplicated
     
    Last edited by a moderator: 26th Oct, 2006