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What to do????? I need advice!!

Discussion in 'General Investing Discussion' started by Stevo, 5th Dec, 2008.

  1. Stevo

    Stevo New Member

    Joined:
    5th Dec, 2008
    Posts:
    3
    Location:
    Perth WA
    I am currently living in a house which I own and have no debts.

    I am building a new house in the same area and have taken out a loan for the purchase of the land and a line of credit for the costs of the building. Approximately 150k for the land and 200k for the house.

    I am planning to rent my current house but have the dilemma of owning it as far as negative gearing goes (of which I know very little about but is a term used all the time!!!)

    For the last financial year we claimed the interest on the land loan in our tax return as we thought we would rent out the new home and stay where we are. But now with another baby on the way we would like to move into the new house cause its bigger and the kids will all have their own rooms.

    How can I make the old house my investment property and claim on the loan of the new property???

    Any advice greatly appreciated!
     
  2. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    We were in a similar position to you (although we didn't build our new house) and did the following:

    1) Get a valuation done for your existing house by a property valuer
    2) Transfer the house you are currently living in at the valuer's suggested price from your own name into the name of a discretionary trust. You will need to pay stamp duty and legal fees etc plus establishment costs for the trust
    3) Go to the bank and borrow, as trustee for the discretionary trust, the total value of the property. Interest paid on this loan is now tax deductible, but it is important to remember that only the trust gets the tax deduction
    4) As trustee for the discretionary trust, rent out your investment property
    5) If your interest payments on the loan you take out is more than your rental income, you are negatively geared - these losses may be carried forward by the trust and offset against income in future years
    6) If your rental income exceeds the interest payments on the loan, congratulations - you are positively geared (this is something well worth aiming for)

    Instead of a discretionary trust, you could use a company, or some other structure (seek professional advice!) but this is the basic framework.

    An option that I would encourage you to consider is to sell your current house completely and buy a completely new & different investment property instead in your own name. If you do this you can borrow the money yourself and gain the benefit of the tax deduction for yourself (rather than the trust or other structure).
     
  3. Stevo

    Stevo New Member

    Joined:
    5th Dec, 2008
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    Location:
    Perth WA
    Thanks for the advice!!

    I think the best thing to do is sell it!

    But what if we managed the investment property ourselves and just dodgied it up a bit to look like we still lived in the old house and were renting the new one?? Is there some way to do that?

    i just dont want to pay the stamp duty etc to change it all over!!
     
  4. C3PO

    C3PO Well-Known Member

    Joined:
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    Location:
    Adelaide, SA
    You can do that - no problem. The only issue is that you won't be able to get tax deductions on your interest payments (so negative gearing is not an option) because the investment property will be fully paid for.

    All you need to do then is make sure you keep good records of when you start letting the property to tenants, so that it is clear to the ATO at what point the property becomes an investment property as opposed to a PPOR. (this is important because Capital Gains Tax applies once it becomes an investment property).

    I presume from what you have said that this would increase the size of your mortgage on your new house (since you can't release the equity in your current house unless you sell it). But on the plus side, the investment will be positively geared and you can use that income to help you pay off the new mortgage.

    In essence you have to think about whether for your individual situation is it better to get the tax deduction on interest payments on the IP, or is it better to save the stamp duty & other associated costs. Definitely worth seeing an accountant or financial adviser to run the numbers for you.

    Also, many people have strong views about self-managing rental property, so definitely have a think about whether you really want the hassle. Personally I think a good rental agent is worth the expense, esp if you have a sentimental feeling about your old house (there are some very dodgy tenants out there), but others would be in a better position to comment than me.
     
  5. Stevo

    Stevo New Member

    Joined:
    5th Dec, 2008
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    Location:
    Perth WA
    Ok, Im trying really hard to get my head around all this and fully understand!!

    So if I leave it as is and fully own the IP with mortgage over PPOR of 350k what would I pay as far as Capital Gains Tax goes if rented at $400pw?? Whats the rate or pecentage you calculate it?

    What about the fact that we originally set up the new house as an investment property and have claimed the interest on the land loan for the last financial year in our tax return? Would we have to pay that back cause we are now going to make it our PPOR?

    I really appreciate your time and advice!!
     
  6. C3PO

    C3PO Well-Known Member

    Joined:
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    Location:
    Adelaide, SA
    Capital Gains Tax is only an issue when you come to sell the IP (ie when you make a capital gain as opposed to an income).

    Basically as a rule of thumb, 50% of your capital gain (assuming you hold the property for more than a year) is taxed at whatever your marginal rate is, i.e. assume you make $100,000 profit on the resale of the IP - half of that ($50,000) is taxed at whatever your marginal rate is (e.g. at 40% = $20,000)

    If you rent the property out at $400 per week, that income is taxable - so you add it to your other income and declare it accordingly. Because the property is still in your name, it's your income. E.g. if you earn $400 per week in rental income and pay tax at 40c in the dollar that's $160 per week in tax.

    These are oversimplified examples but hopefully you get the basic idea.

    I'm not sure how the ATO would look at your claiming the interest on the land loan last year ... best to seek professional advice on that one. Probably the ATO would consider it an investment property from the time you bought the land until the time you start renting your old house out. This means that when you come to sell the new house in future years, maybe CGT might apply for that first period before you moved into it (not a big deal in the grand scheme of things I wouldn't think). I would get a professional valuation done when you move in just to be certain, so that you can say from "Date X, Value Y" onwards the house is a PPOR - recommend you seek advice from an accountant on this one though.