Forums / Property Investing / Help Needed! / Buying 2nd property

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  • Profile photo of TomTom
    Participant
    @tom-reid1515
    Join Date: 2016
    Post Count: 1

    Hi, I need some help with my situation. I own an investment property worth 600k with a 120k mortgage and am looking to buy a house to live In (about 550k)
    So my questions are:

    Should i raise my loan as much as i can on investment and buy through another bank the house I will live in?

    Or stay with same bank and use equity and re arrange loans ?

    Or any other ideas I am all ears.

    Really appreciate some feedback.

    Cheers

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,058

    borrow against your existing house at the same bank for the deposit and costs. Make sure this is done via a separate loan.

    Then borrow 80% secured on the new property, ideally at a separate bank.

    Result = 105% loan without cross collateralising securities giving maximum asset protection and deductibility of interest.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of TomTom
    Participant
    @tom-reid1515
    Join Date: 2016
    Post Count: 1
    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,304

    Hi Terry,

    borrow against your existing house at the same bank for the deposit and costs. Make sure this is done via a separate loan.

    Then borrow 80% secured on the new property, ideally at a separate bank.

    Result = 105% loan without cross collateralising securities giving maximum asset protection and deductibility of interest.

    That works well if Tom were buying an investment property – but he’s not:-

    I own an investment property worth 600k with a 120k mortgage and am looking to buy a house to live In (about 550k).

    I know that will change your suggestions for him – I’m also interested to see whether there are some neat ways to do that (i.e. buy a fresh “own home” using equity from an IP).

    Benny

    • This reply was modified 2 weeks, 1 day ago by Profile photo of Benny Benny. Reason: Adding a quote
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,058

    Sorry I read it the other way.

    If can still and should be structured like I wrote but the interest on neither loan would be deductible.
    The amount of deductible debt won’t change and would be limited to the interest on the $120k loan (at most).

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 271

    Terryw,

    even if he created a new loan on the current IP, that would be deductible wouldn’t it?

    its not mixing the loans, its creating a new one at the full loan amount? that way the interest is deductible?

    or am I missing something.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,058

    Terryw,
    even if he created a new loan on the current IP, that would be deductible wouldn’t it?
    its not mixing the loans, its creating a new one at the full loan amount? that way the interest is deductible?
    or am I missing something.

    No the interest wouldn’t because the use of the funds is for private purposes. security for the loan doesn’t matter.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 271

    The use of funds is for an IP? an income producing asset?

    So if he used those funds for another IP, then the interest is deductible?

    There is no private purposes. just using equity in IP 1 to buy IP 2.

    no mixing at all?

    would this then work?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,058

    I thought he was borrowing to buy a house to live in?

    If he borrows for another investment property the interest could be deductible.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 271

    Sorry, yes in the above case its for PPOR, which is not deductible.

    and you answered the question I had as well, as I thought.

    now in relation to the above

    is there a work around for deductions on that IP if he uses it eventually for PPOr

    for e.g. putting equity from IP into Term Deposit then parking in offset, does that mean the debt created in the IP becomes deductible?

    why is it a case of only the $120k is deductible? If its refinanced why wouldn’t that now have tax advantages?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,058

    No work arounds I’m afraid other than transferring title. I will post below an article I have written on this topic

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,058

    11 Strategies for when you move out of the PPOR and keep it

    There are several things that can be done to improve the tax situation of moving out of the main residence and into a new main residence while keeping the old main residence and renting it out. Often there will be large amounts of equity in the original property while the new property will be purchased with a loan and it will have non-deductible interest payments. On top of it the rent from the old PPOR will be taxable with little to deduct!

    So here are some strategies:

    Strategy 1: Sell First property

    If you sell the first property you can then use the proceeds to pay down the non-deductible debt on the second property and then borrow to buy another property for investment.

    Spouse A owns 100%

    Spouse A sells to a stranger

    Or

    Spouse A and B own 50% each

    Spouse A and B sell to a stranger.

    Strategy 2: Sell First property to spouse

    If the first property is owned solely by Spouse A it could be sold to the Spouse B.

    Spouse A owns 100%

    Spouse A sells to Spouse B

    Spouse B owns 100%

    This will allow the non-owner spouse to borrow to buy the property which will then be rented out. The interest on this loan will be deductible. The advantage here is that there would be no agent’s fees and the property can remain in the family.

    The added advantage is that duty may be exempt in certain states – this needs legal advice. The property may also be exempt from CGT as well.

    Strategy 3: Sell share of the property to spouse so there is one owner

    Where the property is held jointly it may be possible for 1 of the spouses to sell their share to the other spouse so that the end result is that there is 1 owner.

    Spouse A and Spouse B own

    Spouse B sells 50% to Spouse B

    Spouse B becomes sole owner

    This can also be done where the ownership percentages are not even

    Spouse A owns 80% and Spouse B owns 20%

    Spouse B sells the 20% to Spouse A

    Spouse A becomes sole owner

    The purchaser would borrow to buy and thereby increase deductible interest while money release is used to pay down the new loan. Similar to Strategy 2.

    This may also be exempt from duty in certain states but subject to duty in others.

    Strategy 4: Spouse 1 Sell 50% to Spouse B and later sells other 50% to B

    Similar to Strategy 3 above, Spouse A sells 50% to Spouse B now. The house is then jointly owned. Spouse A then sells the remaining 50% to B – just after or potentially years later.

    Spouse A owns property 100%

    Spouse A sells 50% to Spouse B

    Spouse A and B become owners 50% each

    Later

    Spouse A sells 50% to Spouse B

    Spouse B becomes sole owner

    The advantage with this is reduced stamp duty in some states such as NSW. Instead of paying duty on 100% of the transfer you would only pay duty on 50%.

    See Tax Tip 50: Minimising duty on Spousal Transfers Tax Tip 50: Minimising duty on Spousal Transfers

    Strategy 5: Sell to a related trust

    This is more complex strategy and there are many other issues to consider.

    Spouse A and B own

    Spouse A and B sell to the AB trust

    AB Trust becomes owner

    AB Trust borrows to acquire the property and would be able to claim the interest on the loan used to acquire the property as a tax deduction.

    Spouse A and B are left with a pile of cash which they use to pay off their new PPOR debt.

    This would be a CGT event – but if the house was the main residence it may be exempt from CGT in full. It would likely be subject to stamp duty though.

    Strategy 6: Sell to a fixed unit trust with the original owners borrowing to buy the units

    This strategy will incur stamp duty, but it allows the property to be retained and for negative gearing benefits to be achieved.

    Spouse A and Spouse B jointly own a property

    Spouse A and Spouse B sell to the AB Fixed Unit Trust

    The trustee of the AB Fixed Unit Trust purchases the property

    Spouse A and B borrow to acquire units in the AB Unit Trust

    Because they have borrowed to acquire units which will produce income the interest on this loan will be deductible to both A and B.

    If the trust qualifies there will be land tax savings too in some states. In NSW land tax could be assessable to the owners of the units so spouse A and B will get the land tax threshold.

    Legal advice is essential for this complex scenario as are private ruling applications for both OSR and Land tax. I have received positive rulings for this done in NSW.

    Strategy 7: Debt Recycle A

    Use the rental income from the first property to help pay down the loan on the new property.

    The original property should be positive cash flow as it would have low debt. This cash flow can be used to assist in the payment of the loan for the new PPOR.

    The downside of this approach is that the income from the property will be taxable and the interest on the new PPOR loan will not be deductible. But you avoid the costs and hassle of transferring title.

    Strategy 8: Debt Recycle B

    Use the rental income as above. But access the equity to buy another property. After capital growth has occurred sell the other property and pay down the non-deductible debt

    Strategy 9: Debt Recycle C

    Once you move out you start borrowing to pay for expenses associated with the property – rates, insurances, repairs etc. Everything except for interest on the loan – but this may even be possible in some circumstances.

    Strategy 10: Debt Recycle D

    Pay down the new PPOR as quick as possible and borrow to buy income producing assets such as shares. The income from these assets can then be used to pay down the PPOR debt even more and more income producing assets purchased.

    This may be done on using a loan secured by the old PPOR too. Security for the loan doesn’t matter, what matters is that you use the debt to pay off the non-deductible debt quicker.

    Strategy 11: Planning from the beginning

    If you are starting out into a PPOR then simply plan ahead. You may want to consider:

    – Owning the property in just 1 name as this will allow the sale to the other spouse down the track;

    – Borrowing 105% from the start as this will allow a higher loan to be retained and this will improve deductions once you rent the property out;

    – Borrow on an IO basis as this will keep the loan balance high;

    – Borrow to pay for all repairs and maintenance;

    – Borrow to pay for property related expenses such as rates, insurances etc

    – Capitalise interest where appropriate (get tax advice);

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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