All Topics / Help Needed! / Sell or keep as investment? Dilemma – advice sought please

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  • Profile photo of leonk84leonk84
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    @leonk84
    Join Date: 2012
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    Hi all,

    After some advice as we are currently torn in deciding what to do.

    We own our current home outright and it's worth is approximately $550K. It has been our principal residence since we bought it for over 10 years. We have recently purchased a larger family home in the same suburb for close to

    $1 million (settling in Feb,2013). Our mortgage on new home will be about $800K.

    We would ideally love to keep our existing home and rent it out, however I understand since it is "owned outright" there are zero tax benefits in this.

    On the other hand, we could sell our existing home which would be CGT exempt and reduce our new mortgage.

    In the long run – which would you recommend is the better scenario ?

    Any advice would be greatly appreciated.

    Rgds, Leonard.

    Profile photo of Jamie MooreJamie Moore
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    Hi Leonard

    There are a few things you can still deduct – PM fees, maintenance, insurance, rates, ect. However, the interest repayments (which are the largest deduction) aren't available – which is a bit of a bummer.

    There's a few options to consider. If your able to transfer the asset to a spouse, this could regear the debt. Selling to another entity such as a discretionary trust or selling like you suggested. All options are likely to incur upfront costs – it's just a matter of weighing up them in terms of the benefits over the longer term.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of DerekDerek
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    @derek
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    If the spousal transfer option isn't available then a sale is not a bad thing apart from selling costs.

    It means you'll have approx $500K to reduce your new mortgage by. The total savings in non-deductible interest payments will be very significant indeed.

    If you wanted to invest in other property post the sale of your previous PPOR you'll be able to leverage off your new home and the much lower LVR you'll now have.

    Profile photo of TerrywTerryw
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    @terryw
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    On those numbers it is probably best to sell.

    If in VIC you could sell to a spouse in full or part and avoid stamp duty. In most other states stamp duty would apply.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of Boyd Property GroupBoyd Property Group
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    Hi Leo,

    You are correct your existing house could be sold CGT free but if you want to rent it out from this point forward there will be partial gains to be paid in the future.  For example if you lived in it as your PP for 10 years and you paid 300k for it and now it is worth $550k then if you sell now you take the $250k prof tax free.  In the instance that oyu decided to keep it and rent it out for say 2 more years and claim as an investment and you sell it after this point for say $600k then you will have to pay CGT on 1/6 of the 300k profit.  Unfortunately it is purely a time based calculation and not based on a valuation at the time that you move out of the property and then commence the use as an investment.  As you can see on the above calc you would pay $50k CGT  just so you can rent your property out for 2 years and possbily make another 50k which defeats the purpose.

    You can gear your existing property easily by transferring the equity into your PP (the new home) and then using that homes equity as security for your old house which is now able to be geared 100%

    give me a yell if you need some additional advice

    Andrew

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    Profile photo of MayuranMayuran
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    @mayuran
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    Hi Andrew

    '''You can gear your existing property easily by transferring the equity into your PP (the new home) and then using that homes equity as security for your old house which is now able to be geared 100%''

    but is this useful for tax purpose ?

    Mayuran

    Profile photo of MayuranMayuran
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    @mayuran
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    Hi Andrew

    '''You can gear your existing property easily by transferring the equity into your PP (the new home) and then using that homes equity as security for your old house which is now able to be geared 100%''

    but is this useful for tax purpose ?

    Mayuran

    Profile photo of TerrywTerryw
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    @terryw
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    Boyd Property Group wrote:
    Hi Leo,

    You are correct your existing house could be sold CGT free but if you want to rent it out from this point forward there will be partial gains to be paid in the future.  For example if you lived in it as your PP for 10 years and you paid 300k for it and now it is worth $550k then if you sell now you take the $250k prof tax free.  In the instance that oyu decided to keep it and rent it out for say 2 more years and claim as an investment and you sell it after this point for say $600k then you will have to pay CGT on 1/6 of the 300k profit.  Unfortunately it is purely a time based calculation and not based on a valuation at the time that you move out of the property and then commence the use as an investment.  As you can see on the above calc you would pay $50k CGT  just so you can rent your property out for 2 years and possbily make another 50k which defeats the purpose.

     

    This is incorrect. see s118-192 ITAA 1997.

    It is best not to take tax advice from a real estate agent as it could cost you dearly.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of TerrywTerryw
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    Boyd Property Group wrote:

    You can gear your existing property easily by transferring the equity into your PP (the new home) and then using that homes equity as security for your old house which is now able to be geared 100%

     

    You are implying there is a benefit to this. I cannot see any tax advantage as the deductibility of borrowings depends on the purpose. The security for the loan is irrelevant.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of PLCPLC
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    @plc
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    Incorrect Andrew.

    In the situation you described, it is not time based. The cost base for CGT purposes would be market value at the time it became a rental property.

    Cheers

    Tom

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    Profile photo of SMSF101SMSF101
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    Being entangled in that kind of situation needs a a weighing scale. You need to carefully think about it; what options should you should choose. But I think, given those circumstances where a large amount of mortgage is involved, it is better to sell the old house. With it, you may have the chance to lessen the burden of your new mortgage.

    Profile photo of leonk84leonk84
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    @leonk84
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    Thank you all for your thoughts. As we live in Victoria we are leaning towards keeping it and transferring the property into my wife's name for tax purposes (lower income earner) and can do this via the "love and affection" clause which would not incur stamp duty.

    This will then become our investment property with the new property as the PPOR. However my question is will the transfer to my wife trigger a CGT event ?

    Regards, Leonard

    Profile photo of TerrywTerryw
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    Hi Leonard

    You cannot transfer for love and affection because your wife would not be able to claim any interest unless she borrows to acquire the property for you at market rates. Stamp duty would still be exempt in VIC.

    You need to be careful how you do this or it won't be deductible.

    You also will probably avoid CGT if this house was your main residence.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of leonk84leonk84
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    @leonk84
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    Hi Terry, thanks for your feedback. You are 100% correct, unfortunately there will be no claims on interest (or potential interest). The only benefit will be because the property will be positively geared – any rental income I believe can go into my wife's name as the lowest earner – and hence on a lower tax bracket. (rather than me who is on a higher bracket.).

    Does that scenario sound correct to you. eg. [1] Transfer property to my wife 100%, and [2] Rental income earnt for the year will go under my wife's name and she will be liable if any tax paid on this income.

    Cheers

    Leonard

    Profile photo of TerrywTerryw
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    If your wife is 100% title owner then she will get 100% of the income.

    Since you will have $800k owing on the new main reisdence you would want to sell your share of the house to the wife and for her to borrow to buy it. She can then claim the interest against the income an then this will release funds which can be used to pay down the new main residence loan.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of DerekDerek
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    @derek
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    Hi Leon,

    As Terry has said you need to sell (not simply transfer) your share of the 'old' property to your wife and use the proceeds to pay down some of the mortgage on your new house.

    While this all seems relatively simple you do need to seek professional tax advice to make sure you get the whole thing right from day one.

    I am not an accountant but I assume Part IV of the Tax Act could become an issue too. Be interested in Terry's opinion on this aspect.

    Profile photo of TerrywTerryw
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    @terryw
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    Yes, Part IVA could be an issue, but the ATO has released a publication saying the interest could be deductible ATO ID 2001/79

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of DerekDerek
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    @derek
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    Thanks for that – I will have a read when I get some time.

    Cheers

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
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    Noticed Andrew didn't come back to clarify his incorrect comment or indeed provide us with a fascinating link from the ATO website where it was possible.

    As Terry mentioned always obtain advice from a Licensed Professional.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of jmsracheljmsrachel
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    @jmsrachel
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    This may sound stupid, but if you sell half your share of the property to your wife does that mean she can only buy 50% of what the property is worth. Eg house is worth $500k, she buys you out at $250k? Or can you inflate the price?

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