Wishing you a Merry Christmas and a Happy New Year.
This is my current Situation I have bought my PPOR for $ 3,25,000. Borrowed about 290000 couple of months ago. Right now i owe about 260000 on it. I will be moving into the property in July 08 as its currently rented and i am enjoying -ve gearing. I will have to move into it in July as i have claimed FHOG on the property. My Repayments towards the PPOR is about 2000 per month.
I can afford another investment property of paying upto $2000 per month.
Wife is not working and she is at home.
I need help in the below
1. What kind of investment structure should i go for so that i can maximize the tax benefits me or my wife can get? 2.Once i have the structure in place – Should i go for Buying a Land and Building on it so that i can maximize the depreciation benefits or go for an old apt block in inner city so that it grows in equity (will not get much depreciation benefits on this i think)
Hi Rising Star, Few comments: 1. Firstly, congratulations on reducing your loan by $30,000 in 2 months….thats terrific. 2. Make sure you have interest only loan on your current property. 3. With regards to structure, you should consider trust. You will need to speak to an accountant to discuss different types of trusts and which one suits you best. If you are in Melbourne, I can recommend a very good accountant. PM me, if you want. 4. With depreciation, obviously the newer the house the more depreciation you can claim. You can claim depreciation on houses built after 1987. If you are looking for an inner city apartment, you should consider buying in a block < 20 years old. 5. With your current property, given it is an investment property at the moment, look at opportunities to do maintenance now rather than after moving into it. That way you can claim those maintenance expenses. Hope this helps and good luck
2. Make sure you have interest only loan on your current property.
My current loan is p+I and is fixed at 7.5 % and i do not want to touch that as rates are very high now. I took this out before i spoke to my accountant () . My accountant told me since i am moving into it in 5 monts or so – should be ok and i should pay off the loan.
3. With regards to structure, you should consider trust. You will need to speak to an accountant to discuss different types of trusts and which one suits you best. If you are in Melbourne, I can recommend a very good accountant. PM me, if you want.
My accountant has recommended HDT (Hybrid Discretionary Trust) as my structure where as i can get the -ve gearing on the interest and wife can get the income from the rent. Just to cross verify i spoke to another financial planner http://www.cr.com.au who used to do the same type of HDT, now he mentions that the govt has made a ruling against such HDT and its not safe anymore.
Result – I am confused. Any advice?
4. With depreciation, obviously the newer the house the more depreciation you can claim. You can claim depreciation on houses built after 1987. If you are looking for an inner city apartment, you should consider buying in a block < 20 years old.
Thanks will keep in mind.
5. With your current property, given it is an investment property at the moment, look at opportunities to do maintenance now rather than after moving into it. That way you can claim those maintenance expenses.
Thats a good one. Thanks. I wanted to put floorboards in the current property, can i do that while the tenant is in ? If i do that after he moves out, and after the work is over, i move it. will it be claimable ?
If i decided to buy land and build a house and rent it out, will it make good tax saving for me ? any thing i need to watch out for if i do this?
With your wife not working, she will not be saving much tax if she doesn't pay any, so buying a negatively geared property in your name would save the most tax – income tax. But if an investment property was in your name, and you were the highest income earner, and you sold that, then you would have to pay much more CGT.
So you may save a bit of tax initially, but it could cost you more in the long run.
Also consider that the property may only be negatively geared for a few years. As the rents rise you will get to the stage where it is positive geared and then the income will be added to the owners other income. If you are the owner = more tax.
Another factor is that your wife may start working in the future, so circumstances will change.
That is why buying in a discretionary trust can be good. BUT trusts cannot distribute losses, so you may have a few years with negative income in the trust which you cannot offset – other than against other trust income. In the long run, hopefully, the benefits will outweigh the initial costs.
And tax is not the only thing to consider. I don't like units because of the low land content. Building is good because you can gain some instant equity and get some more depreciation benefits, but you can have more interest initially due to the costs during construction when no rent is coming in.
Just a cautionary note: I'm a little concerned that perhaps you're overly focused on tax benefits. Many people seem to think that a dollar "from the government" is worth ten dollars from any other source! And your questions lead me to suspect that you are in danger of falling into this distorted way of thinking.
You should always make your decisions based on what's the best investment, rather than being overly concerned with tax benefits. I don't go as far as some and say that you should base your investment decision on pre-tax outcomes, but I do think that tax should be just one factor that's considered in the quality of an investment, no more valuable than the potential dollars it represents. Think of this, for example. If you can deduct $10K in depreciation, depending on your tax bracket, this is worth about $3 or $4K per year at most. This is really insignificant compared to the difference between, for example, strong and weak capital growth on the property. This $3-4K represents only 1% on a $400K property…
If all other things were equal, then use the tax benefits to differentiate. But it's exceedingly rare for all other things to be equal; so look at the quality of the overall investment and base your decisions on that.
Repairs: only repairs are deductible, ie fixing tenants' damage. But replacing the carpet with timber floors (or anything other than exactly what was there – theoretically even if you put in a better quality carpet) would be a capital improvement and have to be capitalised, which given that this will be your PPR and CGT-free, is of no tax benefit to you. Tread very carefully here; the ATO is very, very strict about the distinction between repairs and improvements. And given that you've claimed FHOG and rented the property out before moving in, I wouldn't be surprised if the ATO scrutinises your repair costs for this period extra carefully.
Another hint: if you're able to repay so much more than the minimum payments, I recommend keeping the extra in an offset account rather than reducing the balance of the loan. That way, if you decide to move into another PPR later and keep this property as an investment, you can still obtain full negative gearing benefits by simply withdrawing the funds from the offset account. But if you pay down the loan and later redraw it for another PPR, you can't claim the interest on the redrawn portion against your former PPR (now IP).
Congratulations on a great jump onto the property ladder, and best wishes for 2008,
Thanks.. What are you comments about the Hybrid Disc Trust… and what you would recommend?
hi Tracey You are right, tax avoidance is not a good way to think. I just want to be aware of the best structure to go for so that i do not end up being more out of pocket. Once i finialie the Structure i will look for good investments.
Thanks for the Repairs tip..
Oh – i did not know that the redraw's would not be claimable. Thanks i will keep in mind..