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August 30, 2013 - 12:30 pm

Terry, here's some more info on the IP. 

We bought the property in 2009 (new apartment), moved in Jan 2010. My wife and I lived in it as PPOR until July this year, as we are relocating interstate. The property have just been let to a tenant only starting this month on a 12 months lease. I engaged a property agent to manage it and also got the depreciation report done.

Around Nov last year (while it's still a PPOR), I refinanced the property up to 80% the market value at the time to avoid LMI, changed the loan to interest-only, and invested the drawn equity in a unit trust I mentioned. 

I did hear from a mate of mine that once the property becomes an IP, it is best not to mess around with the loan – though I'm not quite sure what he meant by that. Probably the complications you were talking about. I'm happy to just leave it as it to avoid any complications.

I'm a conservative investor. That is why I chose property and unit trust with stable dividends as my preferred investment choice – as opposed to shares. Down the track, I'm considering selling the the IP, cash out and look at overseas property (in Asia) where there are more potential for growth at the moment.

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August 30, 2013 - 8:56 am

Thanks Jamie. I don't have any other debt/loan with interest higher than the unit trust dividend rate I mentioned in (2).

I'm now considering of buying some unit trust and leave some cash for expenses. Maybe open a savings a/c with interest earning for the spare cash.

At least it earning something other than 0%.

On LMI. Say if I go beyond 80% loan for the IP and paid the LMI, can I claim this as expenses come tax time? If this is possible, would it be wise to unlock some more equity on the IP and invest it elsewhere – for example in the unit trust I just mentioned?

Cheers.

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August 12, 2013 - 10:39 am

Thanks Catalyst. I will get my property manager to produce a net income vs estimated outgoing expenses for the property factoring some items you described above. 

Will file my tax with an agent this Sunday, so I'll ask him for full list of what I can claim from the IP, then use that as a guide going forward.

Like you said, if positive I only have to pay tax on half the nett profit. Will also consider the selling and CGT consideration in the future too as you suggested.

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August 11, 2013 - 12:34 pm

Thanks wilko for your reply and tips. It's a 3+ year old unit and BMT told me I can still get a decent depreciation out of it. I forgot to mentioned the insurance. I spent $277 on a landlord insurance for the property.

Never thought I could claim those expenses insured while visiting the property. Will definitely keep this in mind. Will keep those receipts as well tax purpose as well.

I was told that in Victoria a transfer between husband and wife will not incur a stamp duty. Not sure if the regulations has change since then though. I'm thinking, if the tax implication is not that much come tax time, I'd probably skip the ownership transfer bit to avoid all that paperwork hassle.

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April 14, 2012 - 6:16 am

Thanks guys. I will take that into consideration and speak to my tax accountant further about it.

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April 14, 2012 - 5:15 am

xdrew wrote:

hornbill,

There are lots of parts to say about your current invest.

First .. you do realise you have 6 years to be away from your PPOR and still claim it as a PPOR and receive all the capital gains from that? At the end of that 6 years you can either return to the property or sell it. Thats gotta be worth a cracker to you .. you can have someone paying half your PPOR bill for you and you reduce your exposure to the debt by half or more ! FULL CGT exemption .. but no depreciation allowances or interest deductions. Sucks on one account  .. but profit on the other.

Transferring between person to company .. or family member to family member is not a great way to save on tax unless you started with that as the main reason for the deal. Unless you are dealing with larger folios or multiple properties .. bundling into separate names attracts transfer duties and is an expensive way to solve an issue that should have been straightened out in the first place. In other words .. if you are going to run a large company structure or a small one to minimise on tax .. start that way from the outset. Re-arranging assets once title has been exchanged can be a ludicrously expensive procudure to minimise any tax you receive. And on that .. there is always the chance the tax department will change the rules on you. Think trusts .. as they used to be.

Presented with a deal where you have a bad egg (because you are dealing with building defects and legal issues) to take to the market, you'll reduce your chance of effecting the best sale price. Wait until all builders defects and warranty issues are off the table to assure potential purchasers of a solid deal. I make money purchasing bad eggs, and waiting for that .. so I know what I'm on about. The difference between a bad egg and a solid deal can be up to 20% of final sale price .. so its worth that security.

By the way .. you can still run better deals in the current market. Mashing together a couple of properties and splitting a block into strata title .. i revalued it and borrowed against a couple of the properties without need to sell. Gearing with OPM on the rest of the deal .. i am getting 22.7% Gross on the deal .. coupling to 18.3% net after expenses. Its all about gearing and how you work the deals .. NOT how the deal exists on the market.

As far as working in overseas or interstate markets .. it requires you to be on top of the legal requirements .. obligations and permissions 100% of the time. Read a couple of posts in the overseas section to recognise what sort of requirements you need to be fully aware of the dangers posed by investing overseas. Become your area expert .. or .. roll the dice.

xdrew,

I don’t quite get you on the 6 years, PPOR, CG exemption bit. If I rent elsewhere for say 5 years, then decide to sell my apartment (which I rented out for all that time), I get CG exemption? Wouldn’t my PPOR be my new rented property, and not my apartment? How do I then declare any loss/profit of my leased apartment to ATO?

On the title change, I ran some rough numbers with my tax accountant and she said it may not be worth the hassle to change the title or even get the depreciation schedule done…we’ll see once I get all numbers on the table.

The property is actually solid, good location, close to uni and major shopping and easy access to CBD. The bad eggs bit are mainly in the common areas which we are addressing now.

Once resolved, it would be a good property to keep for long term rental. Of course I will always look at overseas option. I’m actually finalising 1 overseas property purchase at the moment (in Malaysia), mainly for long term retirement purpose, to lock-in current market price, and more importantly stay close to family than making big bucks out of it.

My brother-in-law bought his property by the same developer 2 years ago in next door development and price has gone up by a whopping 30%. Sounds like Australia property market 30 years ago when price doubles every 7 – 10 years, before it pauses for income to catch-up and supply/demand to rebalance itself. It’s emerging market from my personal opinion. As I said, main purpose is to secure a property for my retirement and to stay closer to families in the future, than anything else. That, to me is priceless…

Also to split my eggs (risk) into different baskets. I am a Malaysian citizen, but even then it took me several years to observe and research this market, getting some advice from friends and families before I took the plunge.

I fully agree, oversea investment can be tricky sometimes. I’ve got a family now, with single income household and other commitments, I have to be very critical of my risk/reward analysis and ensure I also have my worse case scenarios adequately covered.

Btw, if you’re interested to see what I bought (http://www.cascadia.com.my/the-product-bamboo.php). I paid approx $215K (AUD) for it (today’s exchange rate). I’m taking local mortgage there @ 4.15% interest rate (variable loan). Let me know what you think. The most likely place I will live in the future – when my wife and I grow old, and the kids are free to roam the world by themselves..

Now you understand why I can’t buy a 2nd AU property (especially not in the near future) due to my current commitments…

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April 14, 2012 - 4:06 am

Qlds007 wrote:

John

Hate to say no lender will lend your wife a cracker if she is unemployed especially since the intro of NCPP.

If you decide to sell the property to your wife there is nothing to stop her being on the Title and both of you being co-borrowers or alternatively you buying a percentage of the property from and going from Joint Tenants to Tenants in Common.

Need to work the numbers to see whether it is a viable option.

Cheers

Yours in Finance

Richard,

What’s NCPP? What’s the main difference between joint tenants and tenants in common? Just met a rental agent today.

Will get some numbers off him, before looking at depreciation schedule, title change etc.

Btw, the agent suggested I do a depreciation schedule every year. Is this normal? That’s like $600 / year expense is it?

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April 8, 2012 - 6:37 am

Thanks Freckle. You’re probably right. Doesn’t appear to be any chance of CG anytime soon. Main reason why i want to hang on to the property for now is because we have some building defects and legal issue going in with the builder at the moment. If i sell now, we may not get a fair market value for it, due to the building issues.

Assuming market stays flat until we settle the legal issue and if we win (which seem like a high chance at the moment), at least i have the option to put it on the market and get get as close to market value as possible, once the issues resolved. I know these are assumptions and things can go either way…

Other option is sell now, take the money and invest elsewhere. I can park some 65K @ around 8% p.a return tax free overseas – and it’s legal. Balance 135K cash maybe invest in some asian booming property market, which is looking more promising right now. We then move to rent somewhere and use the overseas investment income/CG to cushion the inflationary effect and our rent rises..

Just my hyphotetical, high level options on the table right now…what do you guys think?

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April 8, 2012 - 4:29 am

Bradley Beer wrote:

Hornbill,

If you are looking to rent the property out. A Tax Depreciation Schedule can certainly add some financial benefit to your Tax Return at the End of the Financial Year.

Regarding your query about whom can help, the ATO considers Quantity Surveyor's as having the skills and knowledge to estimate and assign values to the building and it's fittings and fixtures for depreciation purposes.

Depending on the age of the property and length of ownership, if you rent the property out there may be several thousands of dollars worth of taxable deductions within the property that you are entitled to each year.

Bradley Beer
http://www.bmtqs.com.au

Thanks Brad. The property is relatively new, about 2 years and 4 months old since we first moved in. I’m not sure how the whole depreciation schedule works though. Will it also take into consideration any building defects (major or minor) within the individual unit as well as common property areas??

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April 8, 2012 - 4:24 am

Thanks guys…and happy Easter.

Here’s my plan:

1. Get a quantity surveyor to prepare a depreciation schedule.

2. Meet with rental agent to assess rental potential (and work out all outgoings – management fees etc).

3. Once I have all the numbers, meet-up with a tax agent to determine whether the property is in a positive / negative gear territory.
a. If property is a positive gear, then:-

a (i). Either convert property to my wife’s name (100% ownership) to reduce tax on profit made as she is unemployed. Note: Not sure if bank will allow this though???

a (ii) Or, allocate say 90% ownership to my wife and I take remaining 10% to reduce tax impact, just so I still have some ownership in the property. Who can help me with this?

a(iii). Once I decide on either a (i) or a(ii), I then convert the loan to interest-only. Note: Not sure if there is any benefit doing this though, as we do not intend to buy another property (as we can’t afford it). Instead, we intend to rent another place and start paying rentals. Or, should I just leave it as principal + interest and simply reduce tax implication by doing either a(i) or a(ii)?

b. If property is in the negative gear region, then:-

b (i). I will convert property from joint tenants to single ownership (100% under my name) for tax purpose.

b(ii). I then convert the loan to interest-only. Perhaps same concern I have as in a(iii).

Do most people usually buy another IP once their current IP reaches the positive gear territory, for tax purpose? As I mentioned above, we don’t plan on doing now simply because of affordability.

We simply need a bigger place to stay in a suburb we want to live in. The only affordable way to achieve that now is renting..maybe down the track if we really like the new suburb we live in, we just sell the IP and buy a house there – but that’s another big consideration and decision.

Not sure if my plan above make sense or not. Look forward to get some expert advice from you experts out there…

Cheers.

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March 26, 2012 - 3:09 am

Hi Derek, i guess you’re right. An agent once told me that if I upgrade to bigger property, I actually ‘capitalise more’ than I lose. He was saying 10% drop in bigger properties worth more dollars compared to the smaller ones.

I guess he made sense, although at the time I was thinking in my head he probably tries to encourage me to sell my apartment..

I’m only looking to move to bigger property for now. Due to financial commitment, I can’t afford to buy another PPoR and keep current unit as IP, hence my idea of renting.

If possible, I want to hang-on to the apartment as IP for as long as it’s rentable & profitable – to support my rental at the new place. But having said that, I’m open to other ideas still.

Things would probably becomes clearer once I work out the numbers…

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March 25, 2012 - 11:07 pm

Thanks guys. I will look into the depreciation schedule. May I know who can help me with that? Tax accountant?

Initially I was thinking of converting the property title from joint ownership (me and my wife) into just my name, as she is a stay home mom and not generating income. I had the impression that I might be able to turn the property into negative gearing category – which obviously something I need to put on paper first and taking all considerations such as depreciation schedule etc.

Jamie,
Yes, I did paid a fair bit to reduce the loan to under $200K when we bought it. Actually I only took a loan of $190K. My idea was to avoid borrowing too much back then, and to reduce the interest rates. Perhaps what I should have done is instead to take a bigger loan and use an offset account – silly me!

I take it that I can’t ‘increase’ my loan amount to move the property into a negative gear category? Perhaps a silly question..

So, if after I worked out the numbers and the property is a positive gear one, does that mean it’s pointless for me to change the property title to just my name?

I guess I might have to put up with the investment income tax…

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March 25, 2012 - 10:49 pm

mattsta wrote:

I had a quick look at your numbers, and I suppose you made a mistake when you wrote Body Corporate fee : $420/wk? Perhaps you meant 420 per quarter?

For positive cash flow property investing, you need to make sure that your weekly rental income is higher that weekly expenses. It's really as simple as that

You’re right…it should be $420/quarter for the body corp fee. Thanks.

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January 19, 2011 - 3:48 am

Scott No Mates wrote:

I think that you'd find it difficult to get a money back guarantee unless you had some very tight KPIs. After all, they will present you with various options which will suit your budget, tastes, size requirements etc but you may not 'like' them.

I wonder if there is buyers agent out there that can offer negotiation service only. I will do the research and “check out” those suburb, houses myself and once I’ve found “the one” I like, I then let the BA check it out and do his magic with the sellers agent.

Has anyone done anything like this before?

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January 18, 2011 - 12:20 pm

Jamie M wrote:

I forgot to add. It wouldn't apply to a PPOR because you wouldn't have to pay CGT on it.

Thanks Jamie. I didn’t know that about the bit when you can only claim BA fees after selling an IP. Guess that’s something I may need to consider in the future.

But for now, it’s for my new PPOR. Perhaps I just catch up with one of the buyers agent and see what they can offer, find out their fees etc and go from there. Only if what they can offer is much more than I can research and do myself, I might consider using their service.

Hmmm…would be interesting if any BA agents out there that offers money back guarantee if they can’t find the property I wanted.

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January 18, 2011 - 12:06 pm

Scott No Mates wrote:

generally the ba will have more access to sales information than a buyer. They are better able to negotiate terms for the sale if there are special requirements etc.

Thanks Scott. You mean special requirements such as settlement date, property inspections etc?

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January 13, 2011 - 12:20 pm

Thanks Terry. Yes, I’m doing the sums now before deciding. Most people suggest that making the move towards your 2nd property tend to be harder than your subsequent properties.

Probably not a bad thing, so that I don’t anyhow jump into something so big without doing proper research and work the numbers. Reading some property investment books, magazine, this forum, talking to my mortgage broker and colleagues at the moment.

The plan is to get 1 family home this year. Yes only 1. Keep it simple, then learn and grow from there. Now that I have the end goal, now working on a plan, then take actions to get there.

Conquering procrastination and distraction is what I’m focusing on right now.

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January 12, 2011 - 2:30 am

Terryw wrote:

Ideally I would suggest buying at least one property in personal names as you get the CGT exemption – which will be huge as values increase over time. But this one I would suggest should be in the name of the spouse with the lower risk so as to increase asset protection.

There after, ideally, in a trust, but again it would depend on the numbers. I just worked out buying the first IP in a trust in NSW may cost an extra $5,600 pa just in land tax. This and the inability to save personal tax on negative gearing could cost you an extra $10,000 pa in the early years. This is a huge amount.

But after you buy a few in your own name you will be paying land tax on future properties (once you have used up the threshold) and as rents rise you will not have a loss – from then on it is smooth sailing, unless the government changes the rules again.

Maybe it is easier just to invest in shares – no land tax, stamp duty or negative gearing issues (usually).

Hi Terry,

I’m currently considering changing my current PPOR ownership from joint names to a single name (my name) as my wife and I intend to convert it into an IP. My wife is not working. My mortgage broker said in VIC this can be done within few weeks for only few hundred dollars? Hopefully with this setup, I can then claim 100% negative gearing components against the IP from my employment income?

We then intend to purchase our new PPOR, but I’m still pondering as to whether to use both names or single name? If single name, would it be much wiser (as you suggested above) to use my wife’s name instead to lower the risk, as none of the expenses are tax deductible anyway?

Look forward to hear your comments.