- dd81Participant@dd81Join Date: 2008Post Count: 0
I recently sold an asset and will have spare cash of about 200K soon and another 200K in a few month. I am considering if I should further pay off investment properties in my own name or those under trusts. Note that I have been on Mat leave so no income from job for now and probably will extend the leave for another 1.5yrs or so, however I do have some rental income. FY22 my taxible income was 67K, I haven’t done my TR for FY23 so unsure about the exact figures, but could be about the same or even 20k less due to some major maintenance issues.
I have some properties under my name that the offsets / redraw are full, so no repayment required. Below are the loans that I am still paying interest on.
current Loan offset/redraw Rate fix Loan expire
HomeLoan1 (my name) 333000 0 2.54% 4/04/2024
HomeLoan2 (my name) 187200 0 2.54% 4/04/2024
HomeLoan3 (FamilyTrust1) 172800 20,000 6.04% Variable
HomeLoan4 (FamilyTrust2) 186840 53,000 6.19% Variable
If I pay off (put money in redraw) properties in trusts, does that mean I get taxed more for the rental income vs properties under my individual name? Can I distribute any rental income to my sons? (they are only 1.5 and 3 yrs old though).
I have asked my accountant the same ques but waiting to get a response. And I am opent for any feedback / suggestions. Thank you!
Email MeBennyModerator@bennyJoin Date: 2002Post Count: 1,416
First off, I am NOT any kind of accredited adviser, so I simply present a few ideas and opinions that may help you reach a conclusion or two. Of course, anything I mention should be confirmed via your own accountant or other adviser.
You look to be in really good shape, and have some important choices to make. Here are a few thoughts that hit me when I looked at your post – in no particular order:-
1. Keeping some cash available to get you through the Maternity Leave without troubles would make sense. How much depends on the other “numbers” that are involved. Perhaps keep enough cash to cover a further 18 months of the same income you had prior to the Mat leave. That will likely still leave a bunch for paying down debt, or simply adding it to redraw on a loan.
2. You appear to have funds in the Trusts’ Redraw accounts, but not in your Personal Loans. Was that from earlier advice from your Accountant or someone else, or just a guess on your part? Certainly paying into Redraw should reduce any Interest Cost on that loan, but will that change your monthly payments? i.e. You may be paying a fixed rate per month that includes principal and interest – having $$ in redraw might mean you are simply paying more off the Principal (the saved Interest) without actually reducing your monthly mortgage payment. That may suit you to do that, or it may not – your call.
3. When you exit the Fixed Rate loans next year, your monthly repayments will likely SOAR !!! The interest is liable to go from 2.54% to 6% or more. That is not just a 3.5% lift – it is a 136% lift if an IO loan !! That could alter your calculations considerably, so do be aware of that likely occurrence. That alone might make sense of paying out one of those, and even reduce the other loan to a manageable level (but don’t forget point 1).
4. “I have some properties under my name that the offsets / redraw are full, so no repayment required. Below are the loans that I am still paying interest on.”
Wow, you are doing well !! Perhaps part and parcel of all this might be to consider your end goals – Steve often promotes the idea of using residential properties to generate growth, then, when the Growth component has reached the desired level of Equity, trade yourself into Commercial where a tenant pays pretty much all expenses and the income then “keeps you”. What that level of Equity is, depends on your goals and desires. Is now the time for you to be looking to parlay out of the existing properties? Or perhaps sell one to pay off the debt on all the others?
Doing the latter would (of course) lead to higher tax payments, but that means you are MAKING more. Tax deductions never did replace your losses – i.e. Money spent and claimed against Tax owed would effectively replace just the Marginal Tax that you “overpaid”. Like, you might pay $2,000 on something but only get $600 deduction on your Tax payments (i.e. you still paid $1400 from your own Tax Paid $$). With a property paid off, then you don’t get to claim any Interest on a mortgage payment, but then you aren’t paying a mortgage anyway – how cool. And it throws off cash with little cost – and yes, you pay Tax on that cash that is now largely your Income.
I suspect you are already well aware of much of the above – but I include it for newer investors who may be reading this and formulating their own thoughts re property investing (does it work, and how does it?). And for them, please go back and read the first paragraph of this reply. :)
I hope some of these thoughts prove to be of some use to you, dd81. Maybe not, as your portfolio tells me you are already a solid investor. But your story might attract further comment from members who ARE accredited advisers and can guide your steps. Or correct me where I stumbled *gasp* :(