hello everyone
I have been lurking around this forum for more than 2.5 yrs and this is my first post
but this forum has helped me learn a lot. my husband earns 250000 a year and i work part time and earn 35000 a year. we have two properties. Our PPOR which has now been rented out, we fork out 150/wk to cover the P&I loan repayment. We have also just contracted to purchase a property that is 5k negatively geared a year.My question is; is it worth it for us to pay down our PPOR which is owned in our own names and make it positively geared? or are we better off accessing the equity and investing again and claiming tax benefits by maintaining negative gearing?
The investment property is under a DT structure with a corporate trustee. The loan for this one is fixed for 2 years at 5.9%Thanx in advance
Hi jnb,
Welcome and I hope you hang around and grow with the rest of us.
Reading your post a couple of times it would appear as if you are yet to really work your overall strategy to determine what it is you are trying to achieve. Reading between the lines it would appear your focus is too heavily orientated towards tax savings rather than wealth creation. Sometimes the two events do not run in conjunction with one another.
You cannot live off negatively geared property in retirement other than a staged sell down process. Is this in keeping with your overall plans?
Are you currently renting out what was/is your PPOR and are there plans/possibilities that you will move back into it in the future?
Notwithstanding my earlier comments about tax saving – if you will not be moving back into the property in the future convert your loan to Interest Only with the surplus funds being placed in an offset account. I would try and link th eoffset account with the investment loan which has the highest interest rate for maximum benefit.
If there are plans to buy another home at some stage in the future you will then be able to grab the available funds and use them as your deposit money and avoid any messy tax issues. Some people think you can use an IP for security for a line of credit type facility and use those funds as a deposit for their new home and that these funds are deductible because they are secured by the IP – the ATO determines deductibility by looking at the purpose of the loans, in the scenario above the funds were used to buy a home therefore no deductibility.
While your question seems so straightforward the knock on effect of various actions is significant.
Hi Derek
Thank you for your response. Or strategy is not tax focussed at all. The goal is to have 10 positively geared properties in 10 years time (not including our PPOR), 9 years to go now. This is so that my husband can start working less hours as he now works 60hrs a week!!!
We ended up with two negatively geared properties by default because we decided to build our dream home first as all professionals and have borrowed 750K on that (valuation is 950k-1000K) and investment was not on our minds. We then had a baby and I then did not want to work full-time and also fell in love with property during the construction of our home.
Our current situation is we don’t pay any rent as we are house sitting for a friend who has moved to france. We will be doing this for the next three years. The only expense we have is $100 pool maintenance and $40 lawn maintenance for this house. Other than that we pay for any maintenance of white goods etc as and when it arises. So we decided to rent our PPOR out and we are getting $1000 a week for the same (executive rental, fully furnished).
The new purchase is in the CBD hence negatively geared. We purchased it for 310k, 2 bed 1 bath 1 car park. Settlement is due in 3 wks. 294k loan, works out around 87%. We are putting in a new kitchen for around 4000k and repaint the interiors. Its a strata titled apartment. 350 quarterly strata fee plus 1800 council rates. we will be forking out around 5000k annually for this one. but since my husband is paying 46% tax we are hoping to offset this.We plan to purchase something with potential to subdivide next year, probably interstate or regional. Do you think we are doing the right things. Is there any thing that you find impractical about our plan?
Thank you for your input
If you are going to invest in property and are relatively high income then you would be mad not to maximise your negative gearing. So irrespective of how much funds you have, always make sure that your investment properties have a 105% IO loan on each. I realise that this may be difficult for your PPR but a least it can be used as security to enable you to get 105% finance on the other IP’s.
You haven’t mentioned if you intend to move back into the PPR or not. If you don’t then another consideration would be to transfer it into a unit trust, pocket the gain tax free and maximise your deductibility, the funds released could also be used for investing.
Hi jnb
A couple of quick comments:1) You mentioned that the new IP was purchased in Trust. You then say you are looking to negative gear the property. Hopefully you realise this in not possible inside a DFT.
2) Your former PPOR (now investment property) is negative geared yet the loan is a principal & interest loan. Should be an interest only loan with 100% in my opinion.
3) I assume the PPOR is in joint names? Have you considered a spousal buy out. There is a significant difference in you marginal Tax rates so definitely worth doing the numbers to see whether it is a viable consideration.
4) I am assuming that the loans are cross collaralised from reading your post. Definitely not a recommended strategy for an investor looking to increase their portfolio.Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Bardon
Thank you of your response and suggestions. Yes we do intend to move back into our PPOR in 3 years time as we do not want to miss out on the CGT.
How do we borrow 105% finance? Is that by using equity in the PPOR?
Also, we have purchased our IP under a DT structure with company trustee and the share holders of the company is another trust. This means we cannot claim losses on my husband’s income and will have to wait till the property starts making income. Do you think next IP should be purchased under a unit trust to claim tax deductions. We went for a DT to maximise asset protection even though my husband and I both have professional indemnity in place along with income and life insurance.Cheers
JB
hi Richard
yes i am aware we can’t negative gear the IP in the trust, what i meant was the PPOR rented out.
The spousal buy out is something we hadn’t thought about. How do we do this? Just transfer the title to my name?
We have requested A*Z to set up an equity loan to buy our next investment property.
No the properties are not cross-collatrelised. PPOR with A*Z and IP with Homeloans Ltd.Hope that makes sense
Thank you for your suggestions, all taken on board
jnb no not quite as easier as all that.
I would have thought it would have been the other way round you Transfer the property to your husband's name, he then buys out your share and he increases the loan accordingly but there are potential CGT and Stamp Duty considerations to work thru.
I would get the Broker who arranged your Homeloans Ltd loan or the Anz Bank manager to work thru these with you.
This is what we do for our clients and no reason why they wont do so.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Going one stage further why wouldn't you look to buy a substantially positive geared investment in the Trust to counter balance the negative gearing on the PPOR.
Our postive geared properties we released to clients from the UK were such a great success i shall be back in Europe at the end of July working on some more deals for clients. Will release them on the forum once they are locked in.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
What is the advantage of transferring the property into my husband’s name? We were thinking in terms of asset protection and me doing a less riskier job thought it would be safer to have it in my name. Am I wrong? Yes we have just realised that and that is definitely our next consideration now that you have pointed out to look for value adding or positive geared properties
oh i get it, i went back to your earlier post, yes the marginal tax is huge but then we worry of asset protection, i guess if we borrow the maximum equity, this should cover, without compromising the CGT. Am i right?
jnb wrote:Hi BardonThank you of your response and suggestions. Yes we do intend to move back into our PPOR in 3 years time as we do not want to miss out on the CGT.
How do we borrow 105% finance? Is that by using equity in the PPOR?
Also, we have purchased our IP under a DT structure with company trustee and the share holders of the company is another trust. This means we cannot claim losses on my husband’s income and will have to wait till the property starts making income. Do you think next IP should be purchased under a unit trust to claim tax deductions. We went for a DT to maximise asset protection even though my husband and I both have professional indemnity in place along with income and life insurance.Cheers
JB
Reading your subsequent posts I can now see that you are not targeting negative gearing as part of your strategy. To answer your question, yes the PPR is the means of borrowing 105%. Again this is done in my case to maximise negative gearing benefit. My wife has no income and I am a relatively high earner and have set up my housing loans to maximise the negative gearing benefit. With respect to ownership I have properties in my own name and in a Unit Trust. I also have a DT that I periodically use for some consultancy work fees and bonuses and distribute the profits to my non earning family members.
The only way I can see you getting more deductibility as it stands now is for you to increase your borrowings on the PPR for investment purposes. The interest on this loan would then be deductible and I would suggest that the loan be in your husbands name as he is the highest earner.
Hi Richard
Can you tell me more about the UK investment?
Cheers
Jnb
Since your aim is to have positively geared properties, I would suggest that you ensure that your current negative properties are counterbalanced by +ve geared properties. You could also turn the -ve geared ones into positive geared by paying down more of the balance – or even consider selling the -ve geared proeprty and using the profits for buying +ve geared ones only
thanx Richard, will surely do. hi mattsta. thank you for your response.Yes we have decided to stay put for a year and pay more into our properties to make them positive. I have in the meanwhile asked ANZ to do a valuation on the exPPOR to check what equity we have on that one.
I’d definitely go back to the unemotional investing strategy of making money! Why get caught up worrying about negative gearing … a good accountant/financial worth their weight in gold will be able to show you how to manage your tax and deductions in a range of ways.
I’d agree with the comments of buying positive geared and even more preferably positive cashflow properties. Many of our clients are achieving this regularly … from modest income earners through to $450k salary earners …
Hi jnb
If there is one thing I have learnt from 12 years of investing in Aus and overseas, balance is important regardless of high income. If you have a highly negatively geared portfolio it can be a huge disaster if 1. circumstances change; 2. housing market goes pear shaped; 3. Banks loans harder to access.
I offloaded a few of my highly neg properties and it has been the best thing as it has allowed me to grow my portfolio I believe in shorter time frame if I had held all my neg properties.
but this forum has helped me learn a lot. my husband earns 250000 a year and i work part time and earn 35000 a year. we have two properties. Our PPOR which has now been rented out, we fork out 150/wk to cover the P&I loan repayment. We have also just contracted to purchase a property that is 5k negatively geared a year.
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