I currently have two properties, one which I live in and the other an investment. I recently paid off the mortgage on my own property and now thinking about upsizing to a bigger home. I am considering a couple of options
1. Sell the current property and use the amount towards paying off as much as possible of the cost of the new home.
2. Rent out the property, thereby making it a positively geared investment property.
I am a bit skeptical about going with the second option as I would need to pay tax on the rental income as well as capital gains tax when I do decide to sell it.
I am wondering if there is a way to convert this property into a negative geared one. If there is one, would it be prudent to do so?
Any advice would be much appreciated.
This is the disadvantage to paying off your property. Alwayus best to put money into an offset account.
You can't negatively gear it now.
If you rent it out also your new loan for your PPOR is non deductible.
What's the status of the IP?
And yes you will pay tax on the rent as you have no mortgage to offset it. Depends where it is in the cycle as to whether it's worthwhile selling. Buy your new IP and put extra money in an offset account (don't make the same mistake twice). When you have sufficient for a deposit buy again.
raj_paras wrote:I am a bit skeptical about going with the second option as I would need to pay tax on the rental income as well as capital gains tax when I do decide to sell it..Limited information so take what I say with a grain of salt.
Buying and selling in the same market is not necessarily a bad thing. As I see it selling your existing property and then buying your new home may be a reasonable option. Sure you will incur buying and selling costs but it does mean your new home will have low/no debt. Non-deductible debt is the hardest debt to deal with as there are no tax advantages to you.
Buying and selling homes will not incur CGT in most instances.
Once settled in you could use your new home as security to start your property investing.
Depending on which state you are in you may be able to consider a spousal transfer and avoid some costs that way.
There is a way to do this but it will cost you in terms of stamp duty and setting up a trust. I have done it successfully with a previous PPR and it works and the ATO have no issue with it as long as you don't live in it. If you do live in it then you may not be able to negative gear it as there are a few tax rulings on this area.
Assuming that the existing house is a good un and one worth keeping. What you could do is set up a trust, the trust then buys the house, you take out a loan in your name to purchase all of the units in that trust. That way you can maximize the deductibility of the loan and depending on your set up may be able to go 105% on finance. The purchase price would be the current valuation and the proceeds of the sale would go to you tax free to buy your next house. This would also be the threshold that would be used in calculating a future capital gain for that property. It is relatively easy to calculate the negative gearing benefit and work out how long before this would pay off the stamp duty, which should not be more than a couple of years after that the negative gearing benefit is pure cream. What you have also done is minimise the PPR bad debt which is not deductible. So in theory you have the two houses same level of debt except the majority of debt is for investment purposes and is teherfore deductible so you have a far higher cash flow position.
The other benefit is that you can buy your next house in a relatively hassle free way ie not depending on the sale of another one. Make sure you set it up so that you do not live in the transferred house after it is transferred and if you do then be careful about classifying it as an investment property. I got dinged by the ATO for renting an investment property that my trust owned, it wasn't my ex PPR but they still deemed it to be of a personal nature.
What state is the house in and do you have a spouse?
If it is in VIC your spouse can buy it off you for full market value and stamp duty can be avoided. She/he can borrow to do so and this will release cash funds to be paid for the new home and allow the spouse to claim all interest when the property is rented out.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thank you all for your responses. I really appreciate it.
@catalyst – What's the status of the IP? We've had IP for about two years and its currently rented out at $320/week. I am not looking to sell it for the time being as I am able to deduct its expenses.
@ Derek & Terryw – I do live in VIC. The house is owned jointly by my spouse and I. Would the spousal transfer still work for my situation.
@bardon – this sounds like a good option but also seems like there's a fair bit involved in doing this. Is this something which can be done without the assistance of a financial planner. I also need to mention that I am fairly new to property investing.
Thank you all for your responses. I really appreciate it.
@catalyst – What's the status of the IP? We've had IP for about two years and its currently rented out at $320/week. I am not looking to sell it for the time being as I am able to deduct its expenses.
@ Derek & Terryw – I do live in VIC. The house is owned jointly by my spouse and I. Would the spousal transfer still work for my situation.
@bardon – this sounds like a good option but also seems like there's a fair bit involved in doing this. Is this something which can be done without the assistance of a financial planner. I also need to mention that I am fairly new to property investing.
It sounds complicated but its not all the banks do it and its just plain vanilla unit trust, you dont need a financial planner but I would recommend a tax agent though. Just check if you can refinance the whole amount and get it into your name without incurring stamp duty as Terry W suggested and that would be better way to go, no trust and no Stamp duty. I am in QLD and the trust option was the only way I could make it work up here by having an arms length transaction that would massively increase the borrowings on the property. From $56k up to $740k.
Terry, do you know if raj can increase the borrowings in his own name up to the total value of the property with half of the property going back to him ie can his current share of the lending also be increased and classified as an investment in that property.
raj_paras wrote:@ Derek & Terryw – I do live in VIC. The house is owned jointly by my spouse and I. Would the spousal transfer still work for my situation.
Its more important where the house is!
If the house is in Vic then you could transfer your interest to the wife or the wife's interest to yourself without stamp duty – or maybe $50.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
bardon wrote:It sounds complicated but its not all the banks do it and its just plain vanilla unit trust, you dont need a financial planner but I would recommend a tax agent though. Just check if you can refinance the whole amount and get it into your name without incurring stamp duty as Terry W suggested and that would be better way to go, no trust and no Stamp duty. I am in QLD and the trust option was the only way I could make it work up here by having an arms length transaction that would massively increase the borrowings on the property. From $56k up to $740k.Terry, do you know if raj can increase the borrowings in his own name up to the total value of the property with half of the property going back to him ie can his current share of the lending also be increased and classified as an investment in that property.
a Borrower cannot just increase their loan and get the deductions. The money needs to be purchased to acquire an income producing asset – such as buying his wife's share. But VIC is one, if not the only state that allows spouses to transfer between themselves without stamp duty – whether for investment or main residence.
In NSW this would only work if there was no consideration and if the wife or husband was being added to title of the main residence.
BTW, I think this is a major reason to invest in property in VIC. Imagine transferring the property back and forth several times over the years as the value increases with this allowing you to pay down the debt on the main residence (but watch out for Part IVA).
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
bardon wrote:It sounds complicated but its not all the banks do it and its just plain vanilla unit trust, you dont need a financial planner but I would recommend a tax agent though.Its not just a plain vanilla unit trust either – you would need a special fixed unit trust. If the trust is not classed as fixed the land tax exemption may not apply (in NSW and VIC) .
You will also need a solicitor to do the conveyance. Getting a private ruling from the ATO can also save a lot of worrying too.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Okay I understand that's what I thought. In that case Raj cannot increase his borrowings, but also doesn't need to pay stamp duty a simple calc by Raj will show the pros and cons. Also depended on who is the highest earner of course.
Terryw wrote:bardon wrote:It sounds complicated but its not all the banks do it and its just plain vanilla unit trust, you dont need a financial planner but I would recommend a tax agent though.Its not just a plain vanilla unit trust either – you would need a special fixed unit trust. If the trust is not classed as fixed the land tax exemption may not apply (in NSW and VIC) .
You will also need a solicitor to do the conveyance. Getting a private ruling from the ATO can also save a lot of worrying too.
Fair comment on trust deed, just saying its not hard to do. I ain't a big fan of trusts for properties but in my case it was the only way I could make it work with the transfer of a joint name PPR to an IP on a 105% deductible loan.
PS I ended up selling that property, it well settle on Friday for way less than the bank valuation in 2006. The upside is that I now have a capital loss…without really having one.
The house is also in VIC. It is still our PPR while we build the new house. Looks like the spousal transfer might be the better compared to the trust option. Can you please advice where I can find more information on how to do this? Also, can this be done at any stage i.e before/after we apply for the loan for the new PPR (we haven't applied for the loan yet)
Best to talk to a solicitor.
You can check out the Duties Act (Vic) – do a search on the word "spouse" to find the relevant section.
From memory it could be done at any stage.
Since ownership will be changing you will need to redo the loan for this property
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry. I will have a look. Also, are there any tools or information that can useful in figuring out which option would be more suited for my situation i.e choose the spousal transfer option or maintain positive cash flow and use the income to buy more properties.
Raj, you would just have to make a spreadsheet on the different scenarios and consider the figures.
Probably the sale to the spouse would be the way to go as it would be low cost to implement and you would be saving lots of tax so the costs would quickly come back in savings.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
I spoke to a mortgage broker about doing this. He suggested that I need to get a loan schedule advice from an accountant and he would arrange loans based on this advice. Is this true? I was under the impression mortgage brokers were supposed to provide a loan schedule based on the client's requirements. Also, given the end result, I want to achieve, would it be best for me to get advice from an accountant or solicitor?
Unless appropriately licensed a Mortgage Broker cannot provide Tax , Legal or Financial advice only Credit advice.
I cannot see why your Broker would only arrange a loan based on the Accountants advice.
Sounds to me like he may not have too many of these before.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Raj,
just a thought, but if you really would like to turn your property into negative gearing you may go to a bank or mortgage broker and ask to refinance it. You could then keep both properties and use the loan to buy a new bigger one. it really depends on your financial situation though…
You must be logged in to reply to this topic. If you don't have an account, you can register here.
