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  • Profile photo of Good vibesGood vibes
    Participant
    @jacinda
    Post count: 0

    Our situation…please help?

    For years we diligently paid off our mortgage on our home using it as our main asset. Two years after paying our mortgage off our circumstances have changed and we had to relocate two hours north. We have now been in a rental for 5 months and our mortgage free home is on the market. We have been unable to sell our home regardless of a significantly lower price point than what we purchased the house for 8 years ago. The WA housing market is widely said to be the worst it has been for 7-8 years so we are facing a rather large loss to sell the house. We are now facing the scenario where we may have to rent the house out which is not something we wanted to do. I wanted to sell so I could move forward and get our equity out of the house. I can not buy another home unless I sell our home.

    I do not know much about investment properties and I thought if I could somehow get another mortgage on the house and turn it into our investment property it would make a good investment. My husband however says that we can’t do this because our house is mortgage free.

    I don’t know why this is the case and I am quite confused. If we rent the house out as it is we have all our equity tied up and will have to pay tax on the rent we receive and we won’t be able to buy another house as all our equity is in the house. As I understand it now even if we managed to buy another house with a very large mortgage we could not claim any tax offsets because it would be our primary residence rather than a investment property so we would be stuck with an extremely large mortgage and rental income we still have to pay tax on for our first home.

    This all seems confusing and unfair and I am not sure who to talk to or what to do. We approached a property manager and it looks like after all the costs i.e. fees and insurance we will receive less in the hand than we currently pay in rent. Then we will still need to pay tax on the rental income we get. I feel a bit stuck and would appreciate advise or ideas on what we can do. I don’t really know where to start. Do you know of an honest and knowledgable finical adviser in Perth or even some legitimate articles I can read to start understanding investment law?

    I hope my husband is wrong and somehow we can strip the equity out of the house by getting a mortgage on it and turning it into our investment property so we can buy another house to live in?

    Thanks.

    Profile photo of Sandra ReaSandra Rea
    Participant
    @sandra-rea
    Post count: 0

    Sure, you could take out a loan against the equity, however, you might put a different hat on here. Why not look at what your house could be beyond a traditional rental property…. and why do you have to buy another home right now? Maybe you WANT to buy a new home, but you don’t have to. It is a choice. Are you worried about capital gains taxes? You only have to be concerned about that IF you sell your house… and then you have time and enough of it to buy another home and make a good choice. So again, do you really need to buy another home?

    Would you be open to or would it make sense to use this home that cannot sell right now as a short-term rental? As in vacation property or corporate rental property? Or sober living home or assisted living home or group home of another sort? For any of these options you can earn a fantastic income AND you don’t have to do the management. Not even for the vacation home thing.

    How do I know? I have two of them and am looking for a third and forth. As for my primary residence, I won’t be selling. First off, I have just about zero equity because I live in Orange County, Calif. Second, I know I can earn a great income using my home as an assisted living for elders. I am in process of getting the house licensed for such and will make renovations necessary. The cashflow (above the mortgage and utilities and even staffing) is going to be about $7000 a month. So… what can you do with your property beyond selling it or renting it to a single family where you are right… you will make nothing or even be upside down each month?

    Hope this helps.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Post count: 4,954

    I do not know much about investment properties and I thought if I could somehow get another mortgage on the house and turn it into our investment property it would make a good investment. My husband however says that we can’t do this because our house is mortgage free.

    Your husband is spot on.

    You can’t take out an investment loan against the property now – unless you use the funds from the loan to actually invest. Only other thing I can think of is a possible spousal transfer but that’s likely to come at a cost.

    However – you can access equity in the property to fund the deposit/costs on a new home in your new location.

    All in all – you might be able to purchase another home BUT it’s unlikely you’ll be able to obtain any interest deductions on your current investment property.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: info@passgo.com.au

    Profile photo of Good vibesGood vibes
    Participant
    @jacinda
    Post count: 0

    Thanks Jamie so am I understanding correctly that if I now borrow against our mortgage free property (i.e the bank uses our home as an asset for a mortgage) and the money is used to purchase an investment property I can then for tax purposes treat both as investment properties and not have to pay tax on the rental income of our PPOR due to repayment costs we would be paying for the new mortgage that would be above the amount of rental income we get? Would we be able to claim tax deductions for costs on both properties?

    Profile photo of Good vibesGood vibes
    Participant
    @jacinda
    Post count: 0

    Sandra thanks for your reply it has given me something to think about. Unfortunately I don’t think we want to repurpose the building as it’s location does not offer a great deal of options for management of such facilities. Also Australian tax law is probably significantly different to the scenario in the USA. I do appreciate your time though.

    Profile photo of BennyBenny
    Moderator
    @benny
    Post count: 874

    Hi Good Vibes,

    Unfortunately, finance and property investing is not a subject taught in schools – if it were, there would not be as many folk inadvertently costing themselves so many opportunities. i.e. wanting to change their old PPOR into a rental AFTER it is paid off. As Jamie said, any mortgage you take out on it NOW will have the ATO looking at the PURPOSE of that mortgage. If the purpose is to invest (e.g. you borrow to buy an investment property) then it would be deductible. But if you mortgage it to buy another PPOR, or take a holiday, then it is NOT deductible.

    So, what CAN you do? Well, depending on your future goals, if you wanted to begin investing, have a chat with someone (perhaps form on here, or not) who can advise just HOW you might be able to utilise this property and its Equity. It may not be what you might think is ideal, but there will be some way that becomes “better” than other ways. Like, since it is your old PPOR, there would be no CGT to pay if selling – but also, even if you keep it and rent it, you can be away up to 6 years and STILL have CGT exemption when you do finally sell. That is worth knowing eh? Check with an adviser re what happens after 6 years though.

    Another option might be to borrow against that house to buy shares (also an investment) if that would provide a satisfactory solution for you. Then the interest on the mortgage would likely be deductible – but then you might be paying Tax on the profits from the shares…. and even CGT on sale too….

    Really, a lot comes back to you and YOUR goals – consider what you really want to head towards, then take advice on HOW to get there. Many of our members might be able to help you with that….

    And hey, welcome to you – I am glad you have joined us, and I hope we are able to assist you with some good thoughts,

    Benny

    Profile photo of Good vibesGood vibes
    Participant
    @jacinda
    Post count: 0

    Thank you Benny this is very informative and helpful. I am going to seek out a professional to speak with now that I have a basic understanding. Any idea how I go about finding a good advisor and what job title should be seeking out? I.e should we look for an accountant or do we need someone with a different job title? I agree this should be a subject at school that kids learn.

    Thanks.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Post count: 11,765

    GV i am assuming you are either based in the US or are an Australian resident with a US property.

    If correct you are going to need too talk to an Accountant who has experience or who is licensed to operate in the USA.

    Cheers

    Yours in Finance

    Richard Taylor | INVESTMENT MORTGAGE BROKER
    http://www.tayloredfinancialsolutions.com.au
    Email Me | Phone Me

    New Pooled Mortgage Fund offering investors rates to 9.09% P.A. interest paid monthly

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Post count: 0

    Any idea how I go about finding a good advisor and what job title should be seeking out? I.e should we look for an accountant or do we need someone with a different job title?

    Lots of options: Mortgage Broker, Finance Broker, Accountant, tax agent or a financial planner.

    IMHO you can definitely take a mortgage on your PPOR in WA and use that to buy another property (presuming servicibility isn’t an issue), that’s straight forward enough.

    The whole matter gets complex when taking into account taxation. Now, if taxation wouldn’t have bothered you (cost of doing business kind of thing), then that’s one thing, but if it does and you want to minimise tax, that’s another thing. And there is the whole spectrum in the middle.

    I’m thinking of Terry (how do you tag in this forum?!?). He’s a lawyer, broker and tax agent. Am keen to see what he says 👍😎

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor, broker at Aligned Finance - based in Northern NSW, servicing Australia wide

    Profile photo of Good vibesGood vibes
    Participant
    @jacinda
    Post count: 0

    Richard we are in Perth and our property is in the southwest in Dalyellup near the ocean.

    Thanks Ethan. Tax is definitely an issue. I do not want a rental property where we are not getting the benefits of deducting our taxable income and paying tax on any rental income we receive. I would like to be able to negatively gear so that we can reduce some of our taxable incomes.

    I am not worried about having an investment property but this will be our first and I’m not sure if I am ready for two right now if the only scenario is to borrow and keep our house and rent it out and use the money to buy another investment so we can negatively gear IYKWIM. I would be a bit concerned about serviceability of two mortgages and it would be a steep learning curve for me as to where to buy, what’s a good investment, how much to borrow ect.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Post count: 11,765

    Also Australian tax law is probably significantly different to the scenario in the USA.

    OK all noted just the above comment thru me out.

    Certainly subject to the numbers you could look at the highest income earner buying the other parties share of the property out and borrowing to fund this making the interest deductible.

    Course consideration needs to be given to both tax and legal aspects.

    Cheers

    Yours in Finance

    Richard Taylor | INVESTMENT MORTGAGE BROKER
    http://www.tayloredfinancialsolutions.com.au
    Email Me | Phone Me

    New Pooled Mortgage Fund offering investors rates to 9.09% P.A. interest paid monthly

    Profile photo of BennyBenny
    Moderator
    @benny
    Post count: 874

    Hi Ethan,

    I’m thinking of Terry (how do you tag in this forum?!?).

    Simply enter his name (the one with the @ at the front). So, find him on forum first (Search for member names or an old post of his) and you will see he logs as Terryw – in fact, his tag is @terryw too – not always the case for all members, but it works with him. e.g. Richard Taylor on the other hand has a tag line that does not include his name… check it out. Richard has already posted to this thread, so scroll back to see.

    Now, since I have mentioned Terry’s tag above, he will receive a notification that he was mentioned in this thread. Then he can come read it, and add his thoughts as well.

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Post count: 15,448

    I helped a client in a similar situation.

    They had a fully paid off main residence worth $1.2mil. They bought a new main residence for $1.2mil and had to borrow about $1mil to purchase it. That meant about $50k per year in non deductible debt while they were also paying tax on the $30k positve cashflow of the existing property.

    Solution was that we sold it to the trustee of a unit trust with the individuals borrowing to acquire the units. So basically they borrowed $1.2mil and used this money to pay down their new main residence loan. $50k more deductions per year and no non-deductible debt.

    In NSW they also get the land tax threshold.

    We had private rulings from the ATO saying the interest was deductible and that Part IVA would not be used to deny the deduction.
    OSR rprivate ruling was obtained so that we could be sure the land tax free threshold could apply.

    There was no CGT on the sale to the trust. Only stamp duty – which they borrowed to pay.

    Terryw | Finlaw Pty Ltd
    http://www.terryw.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Post count: 15,448

    – And they have the ability to transfer the units of the trust into their SMSF later on – perhaps when the property is cashflow positive.

    Terryw | Finlaw Pty Ltd
    http://www.terryw.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor

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