My thread from 2 years ago - Now what to do..? Please help

Hi all,

First, I really appreciate some experienced advice/help in advance!

My current situation is:
• I now want to turn my PPOR into an IP and purchase a new house.
• Bought current house for $370k approx 22 months ago.
• Initially did a 20% deposit - placing the loan value at $296k.
• Set up a 100% offset account and have just been piling all of our savings into that, not touching the principal.
• Our house has now been valued at $480k, so we accessed $110k of equity and put it straight into the offset account.

We now have $110k + savings to go towards a new house deposit.
I would like to hold on to my property and turn it into an IP. I do understand that only the $296k is 'claimable' although the loan on the current property will be $296+$110k = $406k. Similar houses in the area are renting for around $400 p/w, so we hope for similar.

Say my new house is going to be around $650k (+associated fees), if I use my deposit (savings + equity) to 90% LVR the new place, can anyone suggest what, if anything, is wrong with doing this?

I plan to structure the loan of the new PPOR with a 100% offset.

Would I be better to sell the current place that I am in?

Any comments, feedback, suggestions, etc. are all welcome

Thanks in advance!

(Here is my old thread from almost 2 years ago when I was first looking to purchase this property! I didn't know much then, but know a bit more now about loan structuring! http://invested.com.au/6/what-do-bought-first-home-settlement-38978/index2.html )

 

TC,

Well done, but you have made a mistake. By borrowing $110,000 and placing this into the offset you will have cause the loan to become a mixed purpose loan - part can be attributed to the purchase of the property itself but hte $110k is a private expense.

So I would suggest you split the loan into 2. The $110k portion and the other. The interest on the other would be deductible (if no further redraws had occured) once the property becomes investment.

The interest on the $110k loan won't be deductible as you will use this for the new PPOR loan.

Other than that you may want to consider a spousal sale. Buy out your spouses share or sell your share and borrow to do so. If done correctly no stamp duty or CGT and you will be able to claim interest on a larger portion. Seek legal advice before attempting this.

 

I understand the interest on the 110k is not deductible. But the interested on the $296k is.

But I don't quite understand why I should split the loan?
When it comes to tax time, can't I just say that the total loan is $296k ($406k-$110k) and claim the interest on that 296 portion?

 

I suppose initially it would not make much difference as you could apportion the interest 296/406 = 72.9% should be deductible (based on the rough figures above).

But eventually you will want to pay down the non deductible portion of the loan and if it is mixed then 72.9% of any extra repayments would come off the investment portion.

 

Ok, so the idea is to pay back only the equity debt, as it was not used for investment purposes.. ?
The new property that we will be buying will only be a short-mid term step anyway, so technically it is a PPOR but will end up being either an investment again or sell it when we are done.

I am still trying to understand if I have done anything wrong here.. Do you still think I have made a 'mistake'?

 

So the only way to maximise the claimable interest on the loan amount (once the property becomes a rental) would be to buy out my wifes 50% share? What sort of fees are we talking here?

Would selling the property be wise? As mentioned, I don't really want to due to the growth shown in the last 2 years and the potential for rental income. Plus the fact I am confident we can afford to cover any associated costs on top of our living.

Further question, when does CGT start to hurt me? Something about 6 years - some say to sell the property before then.. however, what if I believe it is still showing growth? I suppose it comes down to crunching the numbers.

 

Tom,
One way to maximise deductions would be to buy out the wife. You need to get legal and tax advise and convey the property. Should be $2k to $3k all up.

Whether to do this now or later will depend on the property and your situation. For example waiting may mean more growth and therefore more cash which could be released.

6 year rule only applies to 1 main residence. So if you buy another you have to choose (later) which is your main one.

Would selling be wise? Wife sell you buy = keep property. If selling to third party there are different things to consider.

 

In the interim though, going by the figures given above, the loan on the ip will be 296k, with rents in the area going for $400 p/w.. we will be positively geared in our ip while still paying interest on our PPOR (bad situation, correct?)..

What if I chose to set my rent so that it is negatively geared? i.e. not enough to cover the 296k (at current interest rates).. but what if interest rates were to further drop and it became positively geared anyway!?

 

The goal should be to make money!

Paying tax is a good thing as it means you are making money. However if there is an opportunity to reduce tax then you should consider it.

Reducing rent would mean you are losing money. Surely it would be better to increase rents as much as possible and to give x% in tax with the remainder being used to pay down the non deductible debt.

If rates drop further you will be making more money on the IP and paying less non deductible interest = good thing!

 

Or I suppose I could 'add value' to the property each year - maintenance, capital additions, etc.

 

TC,
Based on those numbers I am unsure how you access $110k of your equity without paying additional LMI, $480k @ 80% = $384k, existing loan $296 leaves potential $88k equity to extract.

As Terry said, the loan purpose is what determines the tax deductibility. Did you buy your existing PPOR in your sole name or jointly? If jointly, transferring to your spouse may be an option but you will need to go through some hoops with the lender and SRO.

What you are proposing is that you will use loan funds of effectively 105% for your new home, this becomes a large non deductible debt in present form as a PPOR. You will also incur a substantial LMI fee, again non deductible.
For a $650k plus costs, say $35k, you will be borrowing $685k. Using $110k (your proposed option) that leaves a loan of $575k @ 88% LVR and LMI will be around $11k additional for a loan of $586k plus your $110k. Repayments at even 5%, on an IO basis you are up for $2,900 per month.

An alternative is to sell your existing PPOR, less selling costs say net clear $174k, your loan drops to $511k @ 78% and no LMI. You also sell with no CGT implications. IO repayment of $2,130 per month.

Work out the numbers to see what better suits affordability and stress.

You could regard it as trading up, after another 2 years, look to refinance, extract equity and then buy an IP with 105% debt. That would be far more tax effective than what you propose.

I certainly agree with Terry, do not have tax as a major consideration, it can be used effectively to reduce your net costs but it should not be a starting point in considering wealth strategies. Certainly do not consider reducing rent because you may get a slightly better tax deduction, that is backwards looking.
Good luck with it.
Greg

 

Thanks for the response Greg.

Ok, so I might have got my numbers slightly out, but yes we now have to pay LMI on both the existing property and our new future property but keeping the LMI at no more than 90% LVR.

We did buy the house jointly originally, so my intention now will be to transfer my wife's half into my name.

To recap the numbers correctly: Originally purchase price was $370k, plus associated fees. We had a deposit great enough to not incur LMI at the time, so our loan was brought down to $296k.
In the last 24 months we have accumulated $135k in equity.. We also have our own savings on top of this. So, we will only use a small portion of this $135k to make up the deposit for a 90% LVR on the new PPOR.
The new PPOR will hopefully be no more than $650k.

The idea will then be to pay down the equity used, as I now understand this is not tax-deductible. For further information, it is estimated that we could rent our existing property for approx. $375 p/w.

If we can manage to do the spouse transfer, it would be ideal to hold on to the existing property as we did purchase it cheap for the area and it would make an excellent investment property as the area has shown excellent growth.
I understand that if the existing property is 100% transferred into my name, then the tax benefits apply to me only, none to my wife. Also, if/when it comes time to sell, the CGT will be applied at my tax rate (higher than my wife's).

Where to from here? I suppose we need to find/buy the next property and assess it from there.

 

Hey Mate,

As a financial planner I am always surprised to see how many people are emotionally attached to retaining their previous PPR as an investment.

If you are not emotionally attached, do yourself a favour and sell it CGT free, use the proceeds to minimise your new tax deductible debt and then you could look to reinvest into another invesment property borrowing the full amount and therefore you have reduced your overal non-deductible debt (bad debt) allowing you to pay it off much faster and maximised your tax deductible debt.

I think you will also find between the tax benefits and rent gearing into another investment property borrowing the full amount will result in it more or less paying for itself ongoing.

If you are not comfortable doing that then all of the information previously mentioned by others is correct.

Thanks.

 

TC,
SD747 makes a good point, often overlooked, what are your longer term goals and is buying a home to live in now the best outcome? If it is to accumulate property then certainly considering renting. If you are in Melbourne with the traditional low rent yields, you will probably be better off renting in an area you want to live in than trying to buy into the area and use 105% debt. That is on the basis that you use those funds to buy a second investment property.

Build your portfolio and over time, when you are in a position to do so, buy your home to live in for the longer term.

Use an offset for the second property, irrespective of whether it is a PPOR or an IP.

Make sure you use a second lender also, the LMI will be far more expensive if you use the one lender for both properties at a 90% LVR, rather than using 2 separate lenders at 90% LVR each.

At $375 rent per week, it will almost be neutrally geared, so it may make more sense to transfer into your wife's name and it is easier while it is still a PPOR re stamp duty exemption.

Good luck with it.
Greg

 

The attachment to the existing property isn't so much an emotional one. More so, the fact that we bought it for what we consider 'cheap', and the suburb has continued to grow.

I am more so wanting to hold on to it for the long-term growth, but it then mean-time make it tax-effective in whatever way is best.

We have now locked in renters to start this week.. so we will see how we go.

Thanks for all advice.

 

Also, have had advice from a few different areas to transfer /(buy out) my wife's share (50%).. but I believe in VIC this can be done up to the first 6 months after moving out..

 

Not sure what the reasoning for this would be??? You could buy out a spouse's share of a property at any time. No stamp duty implications in VIC as there is no stamp duty on spousal transfers.

Can't think of any CGT reasons either.

 

Isn't there a 6-year cgt ppor rule (only applicable to one property at a time)?

The property is now leased. The title is still 50/50.
Yes there is a portion of non-deductible debt that helped us move to a bigger place. Wouldn't the best strategy now be to transfer my wife's share to my name? Seeing as we have renters signed up for the next 12 months..

At 100% in my name, Even if I sell in the next year or two if repayments are getting too hard, I could claim it as a ppor under the 6 year rule as we lived in it for over 2 years..
Obviously then my new ppor is subject to cgt for the period I claimed the old one as a ppor.

But only have to decide and do the numbers at the time. Surely in the meantime if I transfer the title (effectively new loan including the redraw/equity used which would then make it tax deductible).

At the moment and for the next 12-24 months we forecast that my wife and i will roughly be earning the same amount.

 

There is a 6 year rule for CGT

Above you were referrinng to a state based 6 month rule in relation to stamp duty - or so I thought.

 

6 month rule explained here:
Capital Gains Tax Exemptions

My mortgage broker explains to me that we have 6 months to decide if we want to swap the title into my name or keep it as is 50/50..