Best way to clear PPOR debt

My fav topic! so gonna be a long post:

—Trust—
Swapy has mentioned a few important points so adding on.
1. Having a trust doesn’t sound like it’s gonna solve your problem as such; i would be looking at a better financial structure to lower your PPOR + gearing the tax benefit a lot better ( ie find a better accountant)

-> If you transfer your Ip to the trust, you WILL have to pay the GCT + purchase and mortgage stamp duty ( since it’s a Trust/PTY purchase- however it varies slightly state by state), it’s like selling your IP to a 3rd entity.

-> A standard trust will not receive any of the negative gearing benefit or losses; having said that some trust (depending how your structure it ) can pass the loses to the beneficiaries and still achieve a similar outcome

-> A trust is only useful in 3 common situations;
1. Asset protection- if your going into a risky investment/ financial commitment
2. Your income is in the high tax bracket – trust get’s taxed at 30% straight. + ability to distribute the funds to beneficiaries according to your financials that year ( depending which trust you choose).
3. Can pass on a trust or add kids to the trust in a tax and financial efficient way.

If you want to know more about trust – PM/email TerryW from this forum; his a pro when it comes to trust…i personally have learnt a lot from him.

—Reducing PPOR debt —-

Short term – not the best option….

The quickest option is to sell your IP as you probably know…but selling it to your own trust may not be the best way around this; ie you do a standard sell for $X and make say $200k Profit – CGT kicks in and you after tax profit is $130k ( 35% tax ) goes straight into PPOR. VS

Sell to trust also at an $200k Profit…CGT is the same – so after tax tax profit is $130k ( 35% tax ) – BUT you have to minus cost of 1. Stamp duties around $15k + trust set up cost – $3k, yes in affect these extra funds could be borrowed as an “investment” since it’s soft cost towards the trust…but that’s another investment set up

Long term….

This involves setting up the right loan structure.
1. PPOR set up with Offset account
2. All IP set up as a basic loan on an IO ( interest only – important), with no connecting “accounts”
3. All rent + all income goes into PPOR offset
4. All repayments and bills for PPOR and IP also comes out from this PPOR offset.
5. All tax returns + bonus also goes into PPOR( you get the drift…)
6. Always do a depreciation report.

And if you wanted to be a bit more pedantic and aggressive you could add in step 7. ( a bit of self control)
7. All bills and living expense paid off by a interest free credit card, balance paid off in full before interest is charged ( allowing the extra cash to sit in the offset for 45 days)

—-Capital gain tax- maximize benefit—

This relates back to selling one of the IP to reduce the PPOR debt; this part is important i thought it deserves it’s only section
When you sell, CGT is payable…so how can you within the ATO guidelines minimize this tax? it all comes down to right loan structure, timing and creative strategies

In summary you need to minimize the amount of income receive the year that you sell, not by working less…but by;
1. Doing an IO in advance for 1 year on your IP; so say you do it this year..when it comes to next financial year you will have a improve cashflow and the IP should be +VE gearing…hence more money going towards the PPOR offset.
2. Selling any shares or investment that is making or will make a lost – to offset the CGT
3. Advancing any another investment you might have
4. Fast forwarding any renovations you intend to do on your IP
5. If your work is going to give you any bonus it’s best to speak to the boss amount when you want to receive this…you may instead of getting it now 3rd june…wait till 2st July ( next Financial year)
6. Lastly put off the sale till 1st of july so you got ONE full year to execute the above 5 points…

Ok that’s it for me- sorry there may be some typos…it’s late 2am
Good luck and any questions feel free to holla.

Regards
Michael

This is my loan structure almost exactly. Works a treat, I love it! Including the pedantic part, number 7. Except, I am still a bit confused about exactly when to pay the credit card out. I normally just clear last months balance at the end of the month. If I wanted to stretch out to the 45 days, does this mean I pay the minimum balance by the due date and then the remaining 15 days later? (Not meaning to hi-jack the thread)

Mick,

I think it may be an idea to sell a property. The tax savings overall may be worth the extra costs incurred with the CGT and stamp duty on repurchasing a new investment property. There are also significant asset protection advantages available if you can set it up correctly.

I am a solicitor based in Sydney CBD. If you buy me lunch one day I will go through it all with you.

That's an idea. Sell the PPOR CGT free and move into one of the investments.

Also, considering the other properties were inherited there are CGT concessions which should be looked into.

Yes, if the loan on the IP was used to purchase the IP.

No if the loan on the IP was used for personal expenses.

Yep, I was thinking the same. Sounds like a pretty sweet deal to me

Cheers

Jamie

Maybe best to sell one house per financial year to avoid too big a gain.

You might also want to look at selling half. If they are in your wife's name you could borrow to buy half of the property. Put the cash off your PPOR mortgage.

Or sell to a trust.

But it all depends on your view of whether they are long term growth properties. If not the they may not be worth keeping and may be best to get rid of completely.

Mick- if your wife had the IP from her grandfather’s Will- then from what i understand ( hopefully someone can confirm or correct)
-> CGT is discounted and calculated based on the “Base cost- from the time of deceased acquired” – meaning home was worth $500,000 at time of deceased acquired – 12 month later home is worth $550,000 —- you pay the $50,000 difference in CGT – and it’s discounted at 50% as well since you held it for 12month +

http://www.ato.gov.au/individuals/content.aspx?doc=/content/37184.htm

Regards
Michael