All Topics / Help Needed! / Renting our home

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  • pvasi
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    @pvasi
    Join Date: 2013
    Post Count: 7

    Hi everyone, we have just burrowed to purchase a bigger house for our family to libe in .We have paid off our mortgage on the house we are in now.
    I am intending to keep our current home to rent for about 400 a week. Just wondering what the best financial strategy would be. As I cannot claim for the interest I am paying on our new home loan. So would It make more financial sense to burrow for another investment property.
    First time I have been on here. Anyone have any ideas what would be the best way to go about this.
    Thanks ahead for any ideas.

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
    Join Date: 2009
    Post Count: 2,539

    Hi there

    Which state is the property located in?

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    pvasi
    Participant
    @pvasi
    Join Date: 2013
    Post Count: 7

    I’m in the south west of WA.

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
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    Hi Pvasi,

    You have a couple of options available to you and it is difficult to give some definitive and constructive feedback without more detail. I'll throw a few options at you to get your mind started.

    1. Sell old PPOR and use funds to reduce mortgage on your new home. Then leverage off increased equity in your new home to re-start your investment journey.

    2. Use rental income of $400/week to reduce your PPOR mortgage. Not sure how much of an effect $400/week will have on your new mortgage. Combine this with your desire to leverage off your old PPOR to start your investment journey.

    Suggest you do some maths with these two options on the table to see which one suits you best. You'll also need to consider your income level, spare cash levels and so on before formulating a strategy moving forwards from here.

    Anecdotal comment from the weekend press reports suggest the investor market in Perth has really picked up in recent months with instances of multiple offers being reported. Deppro also recently reported a 30% increase in investor activity in Perth in January 2013 when compared to January 2012.

    I suspect both of your properties are located in the SW area – if this is the case you may wish to diversify into the Perth metro areas so you are exposed to a wider (some would say more stable market). I am not sure having all of your property eggs in the SW market is a good idea. When the SW goes well it goes well – when it doesn't it certainly doesn't.

    pvasi
    Participant
    @pvasi
    Join Date: 2013
    Post Count: 7

    Hi Derek
    Thanks for that.Yes we have bought again in the same town. Rental demand is very high in our area , we live 1 1/2 hrs fom Perth.
    I was ble to put a deposit of 120 on our new home and paid 440 for it. I think most of the rental should cover the repayments just not sure of the tax implications s at tax time as this wll increase my annual income. Wasn’t to keen on selling it off for a couple of reasons but one was agents fee I would have had to pay between 10 to 15 grand on top of stamp duty for the house just purchAsed.
    We are interviewing a few people this week for our rental we are advertising for 420 a week byt we had one family offer us 450!

    Cheers Peter

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544

    Hi Peter,

    Certainly the additional income from your old PPOR will add to your taxable income so you will need to factor that into calculations.

    How old is your old PPOR? Getting a depreciation report done may be to your advantage in terms of tax minimisation as this can be used to reduce (on paper) your net profits. There are depreciation companies that travel to the south west and will undertake a depreciation report on your property. 

    Speak to your accountant about establishing a new base/cost price for your old PPOR. Now that it has become an IP you will be liable for CGT from here onwards. A formal valuation, for tax purposes, will be required at some stage,

    Your original post asked if it would be worth borrowing again for another investment – ostensibly to save tax.

    Certainly this is a strategy you can employ but negative gearing is more effective at the higher income levels. Your taxable income level will determine whether or not negative gearing is valid, or not. Having said that as a property investor you need to be making money so don;t be overly focussed on tax saving – rather look to make profitable property decisions. This can be achieved through capital growth or cashflow or, if you hit the sweet spot, a combination of both.

    pvasi
    Participant
    @pvasi
    Join Date: 2013
    Post Count: 7

    Thanks Derek
    Can u recommend a depreciation company and
    Is CGT witheld if you sell before 6 yrs. Our home is about 10 yrs old.

    Cheers

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544

    Which SW town are you in? I assume you are more in the Bunbury area.

    I know Deppro do head down south from time to time and are due in (Mount Barker, Albany & Denmark) in the next few weeks. Give them a call on 61026920. Ask for Claire.

    Your old PPOR will start incurring CGT liabilities as soon as you move into your new PPOR apart from a brief period (about 6 months from memory) when you may be trying to sell it after moving into your new PPOR.

    Now it may be possible to delay declaring your new PPOR as your new home but that would depend on advice from your accountant and the general market at the time.

    The 6 year rule only applies when you have one PPOR.

    Profile photo of tsarblatsarbla
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    @tsarbla
    Join Date: 2006
    Post Count: 11

    Hi Pvasi,

    Might be recapping on the advice you already have, but if you wanted the easiest solution in the short term at least, it might be to just redraw/draw a loan on your  rental place so you can move the money from that into your new PPOR, as there are no tax benefits from the interest you pay for your PPOR loan. Conversly, its better to pay more interest on your rental to offset the gain and thus reduce the tax you'll pay. I'm a novice myself, but thought I'd share anyway. 

    Brian

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
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    Hi Brian,

    The ATO does not look at the security attached to a loan when determining whether or not the interest is deductible. Their primary consideration is the purpose of the borrowings.

    If I read your comments correctly you are suggesting Peter redraw from his old PPOR (now IP) loan to pay down his new PPOR to make the redraw loan deductible.

    If this is correct the redraw is NOT deductible as the funds have been used to pay down the new home (the purpose test).

    Cheers

    pvasi
    Participant
    @pvasi
    Join Date: 2013
    Post Count: 7

    Thanks Derek
    I will give Claire a call. I live in Harvey about 30 minutes north of Bunbury .
    Thx peter

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213
    tsarbla wrote:
    Hi Pvasi,

    Might be recapping on the advice you already have, but if you wanted the easiest solution in the short term at least, it might be to just redraw/draw a loan on your  rental place so you can move the money from that into your new PPOR, as there are no tax benefits from the interest you pay for your PPOR loan. Conversly, its better to pay more interest on your rental to offset the gain and thus reduce the tax you'll pay. I'm a novice myself, but thought I'd share anyway. 

    Brian

    There is no tax advantage in doing this.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
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    Hi Peter,

    Certainly would not recommend another property (new IP) in Harvey as you would be over capitalised in a smallish community.

    With a population of 2,500 and a dependence on dairy industry (when I last looked) it would be very susceptible to small hiccups.

    Profile photo of Adrian 00Adrian 00
    Participant
    @adrian-00
    Join Date: 2013
    Post Count: 10

    @pvasi

    I thought I'd quote from Noel Whittaker's Making Money Made Simple in order to answer your question:

    "The best course is to sell the old house, use proceeds to help buy the new house and then borrow against it to buy the investment property. This enables the rents to be offset against the interest."

    pvasi
    Participant
    @pvasi
    Join Date: 2013
    Post Count: 7

    Hi Adrian,
    Thanks for that, my only concern with that is when you sell you have real estate fees plus stamp duty fees when you are buying again and a whole lot of other associated fees.
    I would think maybe purchasing another property with a positive cash-flow.
    Not sure if that’s the way to move forward. Just keeping my options open at the moment.

    Cheers Peter

    pvasi
    Participant
    @pvasi
    Join Date: 2013
    Post Count: 7

    Hi Derek
    I found this article about CGT tax when renting your old PPOR residence, that I would share.

    The tax rules now state that you have a period of 6 years to be away from your property, and renting it out, before you have to start paying Capital Gains Tax.  Whilst this sounds like a great idea, there are a few restrictions to that you need to carefully consider:

    the property must have been your primary place of residence
    there is no minimum amount of time that you had to live at that property, however it must have been a bona fide home
    you can stay away from your primary place of residence and rent out that property for a maximum period of 6 years
    you cannot claim a CGT exemption on another property over that period of time
    There has been some debate about whether you need to move back into the property prior to selling it such that you’re living in it again at the time of the sale, however this is not the case.  The ATO will recognise the fact that
    the property used to be your home and will treat it accordingly.

    It seems though we have 6 yrs before CGT applies on our home when it is rented.

    Thx Peter

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213
    pvasi wrote:
    Hi Derek
    I found this article about CGT tax when renting your old PPOR residence, that I would share.

    The tax rules now state that you have a period of 6 years to be away from your property, and renting it out, before you have to start paying Capital Gains Tax.  Whilst this sounds like a great idea, there are a few restrictions to that you need to carefully consider:

    the property must have been your primary place of residence
    there is no minimum amount of time that you had to live at that property, however it must have been a bona fide home
    you can stay away from your primary place of residence and rent out that property for a maximum period of 6 years
    you cannot claim a CGT exemption on another property over that period of time
    There has been some debate about whether you need to move back into the property prior to selling it such that you’re living in it again at the time of the sale, however this is not the case.  The ATO will recognise the fact that
    the property used to be your home and will treat it accordingly.

    It seems though we have 6 yrs before CGT applies on our home when it is rented.

    Thx Peter

    And the legislation itself
    http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.145.html

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of DerekDerek
    Member
    @derek
    Join Date: 2004
    Post Count: 3,544

    Hi Peter,

    The key point from Terry's link is that you can only have one PPOR at a time. Certainly the legislation allows "(4)  If you make the choice, you cannot treat any other * dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies." you to maintain your original property with CGT free status but you cannot also, at the same time have CGT free status on your new place.

    Hence why I suggested you speak to an accountant about which property is best being declared as your PPOR.

    Cheers

    Profile photo of Adrian 00Adrian 00
    Participant
    @adrian-00
    Join Date: 2013
    Post Count: 10

    Hi Peter,

    That is a fair concern.

    I've written up as an example the costs of buying a property here. In the examples I've crunched, the buying costs are just under 6% (with Lenders Mortgage Insurance) , and the selling costs are just under 4%. 

    So, my examples have a total sunk cost of around $39,000 to buy and sell a $400,000 CGT exempt property in NSW.

    It's up to your discretion, with the help of a trusted accountant, whether these costs outweigh potential benefits of structuring the way Noel Whittaker suggests.

    When you do decide on a strategy, here is a quick guide on the type of home loan which is suitable to your strategy (scroll to the first table).

    I hope this helps,

    Cheers Adrian

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