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Whether to sell PPOR or turn it into an IP???

Discussion in 'Real Estate' started by sjw121978, 7th May, 2010.

  1. sjw121978

    sjw121978 New Member

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    Hi all,

    I just wanted some advice on what would be the best option for us.

    We currently have a PPOR worth $700K and a mortgage of $300K.

    The property is inner Brisbane City and we are wanting to upgrade towards the end of the year in another City as I am taking a new job which inherits a larger income.

    The current mortgage is interest only with a 100% offset account. If we rent the property out it would probably be positive geared and therefore causing us to pay more tax.

    We are looking at purchasing a new property worth around 1-1.3 million and are deciding what would be the best option:

    1. Sell ppor and use profit as deposit on new ppor. Then buy new IP which would be negative geared.

    2. Use equity to buy new ppor and turn it into an IP

    3. Sell ppor to a trust

    We would like to make the most tax-effective decision that will benefit us in the long term but would hate to let go of a property which will always rent and grow in value.

    Any comments would be welcomed.

    Cheers.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    First question in relation to using trusts is: do you intend to acquire more investment properties in the future? Are taxation benefits from negative gearing important to you?

    Might not be worth setting up a trust just for a single property, especially if you intend to purchase IPs in your own names for negative gearing purposes.

    Option 1 is probably the most tax effective, but the transaction costs of all the sales/purchases will eat into any tax savings you may have made. You'd need to do the sums to see whether it is worthwhile.
     
  3. sjw121978

    sjw121978 New Member

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    Hi Sim,

    Yes, I do intend on purchasing more IP's in the future including property I'll be using for business purposes.

    Negative gearing is one way I am planning to get some tax-deductions to offset the my wage which will increase considerably over the next 5 years.

    Not sure whether that means a trust is worthwhile or not?
     
  4. CJ. Wentworth

    CJ. Wentworth Well-Known Member

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    Do you have much sitting in the offset account? Have you based the positively geared scenario on the full loan amount, or the amount left after funds in the offset have been taken into account?
     
  5. sjw121978

    sjw121978 New Member

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    Yes, I based it off the amount left after the excess funds have been taken into consideration.

    If we keep the property and convert it to an IP, it will definitely be positively geared based on the current rental market. We will then create a 100% offset account with the new ppor and try to pay that down as quickly as possible.

    The question is whether it makes sense to keep it or not. We have made a good profit on it and should we sell to reduce the nondeductible debt associated with the new PPOR or keep it as it is an asset that will likely continue to experience capital gain given the location?
     
  6. Billv

    Billv Getting there

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    I think option 1 is your best bet.

    With a low PPOR debt you can still buy another IP in Brisbane or elsewhere

    An upgraded PPOR is not a bad idea.
    PPOR's are my favorite investments because they are CGT free. :D
     
  7. CJ. Wentworth

    CJ. Wentworth Well-Known Member

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    My apologies since I still don't know if you have a large amount in your offset. Is the full loan 300k, or is it something like 400k with 100k in offset (leaving 300k remaining).

    The reason I'm asking is that depending on your circumstances, you could purchase a new PPoR, and treat your old PPoR as an IP for up to 6 years. Up to this 6 year period, if you sell the PPoR converted to IP, you can claim it were still your PPoR thus keeping the CGT benefits.

    Obviously speak with your Financial Planner or Accountant about this '6 year rule'. If it is a case where you hold 400k loan with 100k offset you could take the funds out of offset before the 'conversion' thus maximizing your tax deductible debt.

    Please keep in mind that I am by no means an expert at anything... just someone interested in the finance world. I may be completely wrong about the use of the '6 year rule'.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You could do this, but you are only allowed to claim CGT exemptions on one PPOR at a time. You do get to choose which one though.

    As stated, you could continue to claim CGT exemption for your old PPOR for up to 6 years, but your new PPOR would then accumulate some CGT liability during that time, so when you eventually sell your new PPOR, there would potentially be some CGT payable.

    You'd need to have your new PPOR valued at the end of the 6 years and then keep this information until you sell to be able to work out the CGT owing.

    Naturally you should get some professional advice here - there may be some circumstances where this is not possible or advisable.