I have a PPOR that is suitable for developing.
(Retain existing house PPOR and build unit at the back)
Ideally, I would retain the new unit as an IP.As I understand it,(please be gentle with me as I am a complete newbie to all this) the sequence is:
1. Borrow from bank to fund the development
2. Once development is completed, have bank revalue the IP and borrow 80% LVRMy question is:
How do I get my hands on the “profit” from this development? ie the difference between what it cost me to build and what the bank will now lend me. I would like to use this money to reduce the loan on my PPOR.If I sell the IP I will then realise my gain but I want to do this without selling.
Is this possible?
How do I structure things?
Tax implications?Thanks
You can only get the profit if you sell. If you have equity and increase the loan, the extra portion could be paid into the home loan part, but this would not result in any tax savings. Tax deductibility is determined by use of the funds borrowed.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Don’t know that I agree with Terryw’s opinion. You don’t need to sell to get the profit out. If you do, yes, you get the cash but you also deplete the profit by the tax.
If you don’t sell but hold the development and unlock the increased equity through borrowing against it, you don’t lose the tax and still have an appreciating asset.
Yes, it’s true that the interest on the borrowings to pay of your home loan is not tax deductible – Terry is right, it’s the PURPOSE of the loan that determines its tax deductibility – it might be a whole lot less than paying the tax on the profits of the development site.
I’m a developer and try to hold as much of a development site (the profit anyway) in units/houses because I’m not prepared to lose 30%+ of it in tax. I’m more than happy to pay 7% interest. Plus, with a good accountant, there are other ways to legally and legitimately minimise the non-deductible interest.
Hope this helps.
Megan
http//:www.propertyhub.net
Thanks for your replies Terry & Megan.
So basically all I can do would be to have a split loan over the IP. Part would be be tax deductible and used for IP/investment purposes only. (To pay for the development mostly)
The other part would be for private use and NOT tax deductible BUT I would be paying interest on the money that I use but NO income tax.I want to pursue the development to be able to DECREASE the loan on my PPOR. If I do the above I am just shifting the loan and still paying interest.
Sounds like the develop, sell & pay tax route is the best. Can this be true????
Thought No.2
How about developing it (in my name) and then selling to another entity (Family trust) for the bank valuation??
I would still pay personal tax, but would retain ownership on the IP in my trust. Would this be legal and beneficial??Megan, I would be interested to here more about the “other ways to legally and legitimately minimise the non-deductible interest.”
Thanks,
TonyTony
I recommend you speak to Ed Chan of Chan & Naylor accountants. This guy really knows his stuff, he’s a developer himself and is amazing with structuring – probably one of the best experts in the country. Email me if you want his details.
I’d also have a think (and get some advice) about developing in your own name – not many developers do this and there’s a good reason why.
Your idea about selling to Family Trust means you’ll have to pay tax, another lot of stamp duty and perhaps CGT as well.
My friend, you need to get yourself off to talk to a good adviser before you do another thing – it could save you thousands (if not hundreds of thousands).
It’s very important that you know what your exit strategy is with your developments before you start (sounds like you’ve got it planned) and then get advice as to the right entities that will allow you to do it without incurring unnecessary taxes duties etc.
Sounds like you’re on the right track – just need to get the details in order.
Good luck with it all.
Megan
http/:www.propertyhub.netI do not see any reason why you would borrow against an investment to pay down non-deductible debt. All you will be doing is adding unnecessary expenses in the form of loan application and fees and charges.
The comfort excuse is of no significance because if things go sour, you can sell the investment and pay down the debt on your PPOR.
If you are concerned about your PPOR, I would look at the structure on that loan and keep the investment and developing options totally separate.
TMA
http://www.email4money.info
Investor Links
First Home Buyer WebsiteMegan, Thanks again for your advise.
My exit strategy would be to (ideally) develop and hold for the long term.Which brings me to TMAs post. My wife wants the final result to be the elimination/reduction of the loan on our PPOR. As TMA says, this is a “comfort” thing that I am trying to accommodate while also building an IP portfolio.
I have another IP (our first)
My wife sees the additional debt.
The IP produces cashflow through our bank which offsets our PPOR loan, so it is assisting with our mortgage.Tony
Offsetting non-deductible debt is fantastic. As long as you ensure all your income (both of you) and all rental income goes directly into the offset account, you should make good inroads. There really is no benefit borrowing from the IP just to feel a bit more comfortable.
Alternatively, borrowing against the IP to fund additional cash-flow positive investments will help reduce the non-dedictible debt even quicker. If your wife can see this as the better option, hopefully she will go for it.
Of course, if properties are not rented, you could get into some trouble.
TMA
http://www.email4money.info
Investor Links
First Home Buyer WebsiteCan you get a line of credit for the amount you are wanting? Then you can draw down on it and repay or do whatever with it.
MaxiMaxene L Thomas
A Line of Credit is useless!
There is no advantage using a Line of Credit.
TMA
http://www.email4money.info
Investor Links
First Home Buyer WebsiteTony
I agree with Terry re offsetting non-deductible debt and using offsets is a good strategy. As well, with our developments, we take some profit in cash (amounts that we can either offset against neg gear losses or amounts to keep our tax to a minimum and hold the rest of the profit in the properties.
Perhaps a mix of both, plus using the offset account, would allow you to pay down the non-deductible loan while still not having to forego 30%+ in tax.
Megan
THE SECOND PROPERTY WOULD BE WORTH FAR MORE THAN IT COST YOU TO BUILD/SUB DIVIDE ETC. IT WOULD HAVE TO BE AS CLOSE TO A POSTIVELY GEARED PROPERTY AS YOU WILL FIND. SELL THE ORIGINAL HOME HOPEFULLY FOR AT LEAST WHAT YOU PAID FOR IT. PAY THE LITTLE BIT OF CAPITAL GAINS TAX IF ANY. YOU HAVE SCORED A BLOCK OF LAND FOR THE COST OF A SUB DIVISION. THIS SEEMS TO ME TO BE THE BEST WAY TO ACQUIRE POSTIVELY GEARED PROPERTY. THIS IS MY PLAN. EG I HAVE PURCHASED A HOUSE FOR 160K. IT IS ON A CORNER AND IS JUST UNDER 1000 SQUARE METRES. THE CORNER SECTION IS THE VACANT PART SO THE NEW BLOCK HAS ROAD FRONTAGE. SUB DIVISION COSTS ARE APPROX 15K GIVE OR TAKE. IN MY CASE THE BANK HAS AGREED TO GIVE THE SAME VALUATION TO THE EXISTING HOUSE MINUS THE SUB DIVIDED LAND. BONUS. MY CONTRACT PRICE TO BUILD THE SECOND HOUSE ON THE NEWLY CREATED BLOCK IS APPROX 120K. SO FOR 135K I WILL HAVE A 230K PLUS PROPERTY THAT WILL PAY ITS WAY. SEEMS TO EASY. LET YOU KNOW HOW IT ALL PROGRESSES.
One other consideration is the likely interest rate on the development funds.
With most of our developments (and we do have a good relationship with our Banker and are experienced in doing what we do) we still pay a higher rate than could be obtained on a residential housing loan.
Your Bank are likely to charge you a higher rate so once the devleopment is complete renogotiate the interest rate and if you are not happy with what is being offered consult a mortgage broker and get them to source out a moer suitable deal.
I assure you it is a big market out there and an independant broker can save you 000’s.
Cheers Richard
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http://www.yourstatefinance.comIP funding and US property finance
our specialityRichard Taylor | Australia's leading private lender
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