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ppor to rental and buying a new ppor

Discussion in 'Investing Strategies' started by voigtstr, 6th Jul, 2007.

  1. voigtstr

    voigtstr Well-Known Member

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    somersoft website has this in the faq (Common Property Questions)

    "We own our own house but want to borrow money against this house to build a bigger and better house in which to live. We would still like to keep the one we're living in now as a rental property. Is the loan tax deductible?"

    "The short answer is no, the loan is not tax deductible. This is a classic situation in which many property owners find themselves when they first decide to upgrade. Assessing whether interest on a loan is tax deductible depends on the purpose of the loan – not the collateral for the loan. In this case, the purpose of the loan is clearly to build a new home and not for the purpose of producing income. This situation is a double loss. Not only would the interest on the loan not be tax-deductible, but the rent from the investment property would be taxed at the highest marginal tax rate.

    A simple solution could be to sell the first home and put the proceeds into the new home; you would then borrow to buy a rental property, using the equity in the new home as collateral. The interest on the loan would then be tax-deductible and instead of paying tax, a tax refund would more likely result.

    However, there may be alternatives. For example, if the first home had been bought in the wife's name only, the husband could borrow the money to buy the property from his wife, and she could put the money she receives towards the new house. A legally binding contract is needed, and stamp duty must be paid, however, the tax benefits may far outweigh the transfer costs. I would recommend that you check with both your solicitor and accountant before you attempt any transaction of this nature.
    "

    I'm wondering what other approaches there are if any to buying the ppor and turning our current unit into a rental. What is the most cost effective method (taking taxes into account)? We both earn 50k a year.
     
    Last edited by a moderator: 6th Jul, 2007
  2. Nigel Ward

    Nigel Ward Team InvestEd

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    Perhaps you could sell it CGT free (as it's your home) to your trust and then use the proceeds to buy your new home?

    N.
     
  3. coopranos

    coopranos Well-Known Member

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  4. DaveA

    DaveA Well-Known Member

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    i think part IV would have something to say about this one.... if you buy another PPOR in your name, u cant really claim you are doing it for asset protection.... and id imagine they are arguing that you want to gain as much tax benefit as possible...

    (i remember reading this in a nataional tax accountants association document)...
     
  5. Nigel Ward

    Nigel Ward Team InvestEd

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    Part IVA? I don't think so. You owned an asset. The law says disposal of that asset is tax free. The purchaser, a company which is trustee of a trust, will pay stamp duty and possibly land tax (yes I know both state taxes but just wanted to lay out the picture). If the trust subsequently disposes of the asset then CGT will apply (possibly with the 50% discount if you own it long enough).

    You take the sale proceeds and buy a ppor in your own name. the company has a large loan secured against the house. The interest on the loan is deductible to the Company...not to you. You get distributions from the trust...but it's probably neg geared...

    Sorry where's the part IVA scheme? Maybe I didn't describe the process fully?

    N.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think moving an (ex PPOR) investment property into your trust is a valid asset protection exercise, the risks increase significantly when you convert a property to an IP, and so to keep it separate from your other personal assets (ie your new PPOR), you'd move it to the trust.

    Tax avoidance is by no means the only goal in this move - indeed it costs you quite a lot to sell a property to your trust, even if it is CGT free (I should know, I did it - stamp duty / refinance costs / conveyancing fees / etc!!).

    Naturally, you'd want to get some good advice from an accountant/tax specialist before going down this path.
     
  7. DaveA

    DaveA Well-Known Member

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    thats a reasonable arguement...

    however apart from that, why else would you take the time effort and cost of completing such a transfer, so that you can claim more deductions than you are currently recieving in the current structure....

    apart from claiming higher interest costs (and maybe land tax) there is really nothing else changes from it being owned in your own name to that of a trust, this is why they mentioned Part IV could apply....
     
  8. voigtstr

    voigtstr Well-Known Member

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    It sounds like moving the villa unit into a trust would cost more in taxes (CGT and other state taxes) rather than just leaving it in my own name.

    Interest only or principle and interest for the villa unit? Is it more effective to have cash flow paying down the non deductable debt of the ppor loan (ie new house to live in) isnt it?
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    There's nothing wrong with minimising tax - don't get trapped into the thinking that tax minimisation is illegal - we're not talking about evasion, we're talking about valid tax planning strategies.

    The things you need to be careful of are tax schemes, that is, commercial facilities set up and marketed specifically (and only!!) for the purposes of minimising tax. This is what Hart's case featured - a commercial split loan arrangement that had no significant benefits beyond the tax minimisation aspects.

    Some trust structures being marketed today are very close to tax schemes, and will (in my non-professional opinion), face very very close scrutiny by the ATO - but that doesn't make all trusts illegal from a tax perspective.
     
  10. coopranos

    coopranos Well-Known Member

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    Shouldnt be any dramas doing this, you arent avoiding any tax - you can still only claim on main residence exemption at a time, so its not an issue. Of course you would make sure that everything is done at arms length, ensuring that appropriate valuations were done on the property etc.
     
  11. Redwing

    Redwing Well-Known Member

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    voigtstr

    Is your Unit paid out though?

    We turned a Unit (2BR) into a rental (value was around $140k and we owed $80k), then purchased a new PPOR (3BR) and a few years later did the same thing (prior to establishing a trust to acquire properties within) we still own and rent out the first unit (though paid it out once and owned it unecumbered for about a total of two weeks before we again used the equity within....now we owe $80k on it again and have LOC against that and a few others).
     
  12. voigtstr

    voigtstr Well-Known Member

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    nope, owe 167k om the unit. bought for 180. think its now worth 200.
     
  13. Simon

    Simon Well-Known Member

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    Not much equity to secure two properties with.

    If I was your broker I would be looking at using a lender who will value it as high as possible - aiming at $220K. This might free up some more borrowings. Enough to help you into a second property for a similar purchase price to the last one. A lender who will do that for us with the hope of getting both loans sent their way ;)

    In the meantime you should be madly saving another deposit in your offset account.
     
  14. voigtstr

    voigtstr Well-Known Member

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    no offset yet.. just a 5 year fixed interest ING loan on the unit. Also I'm still madly paying down consumer debt. 8k to go on motorbike loan, 2 k on an over draft and another 2 k on a low interest credit card. I plan to have the consumer debt out of the way around January. After that we will certainly be saving lots into navra retail towards a house deposit.. The ING loan only allows for up to 10k extra in repayments before they charge a fee (break fee?) and it doesnt have a redraw facility.
     
  15. Nigel Ward

    Nigel Ward Team InvestEd

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    You should find out how much it will cost you to break the loan early. That may or may not be significant. Maybe they'll thank you for it if the rate's fixed low...:confused: :D

    Cheers

    N.

    ps. to kill your consumer debt more quickly, and in anticipation of your unit becoming an IP, you might think about moving your loan to interest only from Principal and interest.

    Why? 1) no point paying down the debt if it's soon to be a deductible one
    2) the extra cashflow can (AND MUST) be applied to kill the consumer debt quicker.