Please forgive the numbers as well as the inaccuracies. I'm really damn tired but need to get this out before I go to bed, but would still appreciate any feedback. It's the only way I'll learn
Property NOTES:
- Property in Ipswich (Booval). 100m to Booval Fair (Bunnings Warehouse, McDonalds, BigW, Toyota Dealership); Maccas is in sight from the Front Door, however the street is set back from the main street so road noise is non-existant)
- Property asking price 235k @ 7.4% IO = $17,390
- Purchase price of 220k @ 7.4% IO = $16,280 p/year. $8,140 per half year.
- Currently tenanted at $195p/w. May get 200+. Lease has run out this week.
- Building may be too old for depreciation. Very solid though.
- 719m2 of land.
Personal Notes:
- I don't plan on selling, however as it may be my first property I may rethink that at some later date.
- I earn 40-45k a year GROSS (my times fluctuate a little) and have VERY few living expenses.
- I am paid Fortnightly alternating ~$1,280 and ~$1,380 NET.
- My rent is $100p/w and I eat at work so food and such is at a minimum.
- I currently have an 80k loan (on a vacant block of land) of which monthly repayments are ~$450.
- The block is worth ~130k and I've owned it for just over a year. The loan started at 93k and I have an available redraw of 13k
- My MB reckons I can get my hands on the money. I just have to make sure I can afford it.
Misc. notes:
- The owner Purchased in 2005 for 198k
- According to the Australian Property Investor, Booval saw a decline in house prices in 2005. (Upper Quartile 230k (-2.13%), Median 200k (-0.5%), Lower Quartile 170k (-2.86%)
- According to API. Booval saw an increase in house prices in 2006. (UQ: 262k (+19.63%) Med: 228k (+16.43%), LQ 188 (+13.25%)
In regards to how to treat the property I understand I have 2 options:
Purchase as PPoR and convert to IP after 6months:
PROS:
- +$7,000 FHOG
- No Stamp or Mortgage Duty (~+$3,426 according to HERE)
- Renovations can be added to cost base ?
- Upon future sale, through the use of the 6 year rule, may be CGT free.
- After 6 months, Interest is Tax Deductable (6 months interest: $8,140 x 30c = +$2,442 on tax return) ?
- If someone/family rents with me under Market Value than rent is Tax Free (no need to claim)
CONS:
- 6 months worth of interest not tax deductible ($8,140)
- Commuting from Ipswich to Brisbane (~$806.40 – $873.60) QRail
- Any renovations after converting to IP will have a depreciation schedule ?
- Searches + Solicitors are not tax deductible. ~2k
Assuming 220k purchase price, after all considerations (FHOG, Stamp duty concession, etc) results at the end of the year:
It will cost $8,140 in interest repayments for 6 months, ~2k in Buying Costs and $873.60 to commute to and from work, totaling 11k. This is offset by the 7k FHOG as well as $2.5k on tax return (after property becomes IP) total 9.5k.
About 1.5k for the year. Also I have saved ~3.5k in Stamp and Mortgage Duty.
Loan amount ~222k after 1 year (220k + 2k buying costs)
Purchase as IP upfront:
PROS:
- All buying costs will be tax deductible (searches, solicitors, etc ~2k)
- All Interest will be tax deductible ($16,280 x 30c = $4,884 on tax return)?
- SD and MD will be added onto Cost Base ($8,093.60 for Stamp and Mortgage Duty HERE)* for CGT purposes
CONS:
- No FHOG (-$7,000)
- Must pay Stamp and Mortgage Duty (-$8,093.60)*
Assuming 220k purchase price:
Stamp and Mortgage duty ~8k + ~2k in buying costs = ~10k. This is offset by the tax refund of ~5.5k from Interest and Buying Costs (2k + 16,280. x 30c = 5,484)
Loan amount ~228k (220k loan + 8k Stamp and Mortgage duty)
OK! Considering I've had NO training in accounting and this is my first foray into the Tax implications, I assume I have missed an enormous amount here. So that's why I'm posting.
Please correct any Concept misunderstanding (FHOG, tax deductibility, etc) or tell me your ideas.
I hope I haven't wasted anyone's time.
It is well documented that you will be better off to keep renting rather than live in a PPoR, as long as you invest the difference between the rent and a likely mortgage payment, but many renters never invest the difference.
Most people have an issue with renting while they have a perfectly good PPoR with tenants in it, so if you can get past this mindset you will do well.
Rather than buy another I.P or PPoR, why not build on the block of land when you are able to finance a construction loan and turn that into option 1. You will have considerable on paper deductions from the new building and you will have a tax deductable loan on the land and building. Loans on raw land are not tax deductible.
There are a couple of statements in your post that worry me CJ;
I don't think your sentence referring to "rent under market value is tax free, so no need to claim" is correct. As far as I know, there is no limit set by the ATO on what is taxable or not; all rent is income and therefore is applied to your personal income when you are making claims. Also, there are many people who hide their rent and miss out on many thousands of tax deductions, and, above all else; it is tax EVASION which is illegal and you can go to jail.
Also, the only time you are not liable for stamp duty as far as I know is on an off-the-plan purchase, but quite often these properties are overpriced anyway, negating any stamp duty savings. You are also liable for mortgage duty – where did you here that these two items you mentioned you will be exempt from?
Gosh I got a few big things wrong. I'm trying to find the article I read that mentioned children paying Board at home, and how the money was treated, as I recall reading something about family members in general. However I may just be dreaming.
http://www.osr.qld.gov.au/taxes/duties/home_concession_may_04.shtml
I realize now that the dates are no longer applicable.
****
Transfer duty relief for first home buyers until 31 July 2004
Under the new transfer duty arrangements, no duty will apply to the purchase of a first home up to $250,000.
Where the price exceeds $250,000, the existing transfer duty arrangements set out in columns 1 and 2 of Table 1 continue to apply. In addition, however, a first home duty rebate will apply. This rebate is capped at $2,500 and reduces by $100 for every $10,000 over $250,000. The rebate cuts out completely for homes costing $500,000 or more.
Followed by
New mortgage relief for first home mortgages
Under the new mortgage duty arrangements, no mortgage duty will be payable by a first home borrower for the first $250,000 of a loan to buy or build their first home.
Mortgage duty, at the rate of $0.40 per $100 or part of $100, will apply to any amount secured in excess of $250,000.
Also I believe that at the moment building on my Land would be getting a bit ahead of the market. My initial plan was to pay the block off within 5 years and build ~1-2 years after that.
I've just been pumping any spare cash into my Mortgage, which I know isn't the most efficient way to "invest" but as it stands, it's the easiest way to save my money.
On the contrary;
I believe that a good business practice for any business/investment is to pay down debt where possible and increase equity, and to re-invest the profits where possible as well.
Sounds like you've got a couple of nice concessions there as well CJ; good work!
Very thorough research with the numbers there..that's impressive. I did not know about the new Mortgage relief how much is that going to amount to for say 200k property purchase?
Thanks
To be honest Jaffa, I don't know. I believe I misinterpreted the Concession dates, and I'm not sure they still apply today. I was hoping to run into someone else who knows about these concessions here
Also, thanks LA
Another important thing to consider in respect of the QLD stamp duty concessions for first home buyers (especially if you plan to go the IP route) is that in order to claim the concession you must live in the property for at least 12 months.
Its not like the FHOG where one can conceivably rent the property out for up to but not exceeding 12 months then move in for 6 months minimum then back out again ….. its an ironclad you must stay for 12 months.
I just bought my first property with every intention of going down the FHOG path as outlined above however the stamp duty concession limited this pretty quickly – my purchase price was $445k so it meant a difference in stamp duty of just over $10,000 to me ….
So i am enjoying the life of owning and living in my PPOR for 12 months now ….. and the associated extra expense – renting is so much cheaper.
Cheers
MeatMeatgroup can you still move into the house on any of the 365 days from settlement, and also rent it during that time and while living in the house? This is in regards to the Stamp Duty concession.
I know that the ATO said you could rent rooms anytime or the entire property with the FHOG before and after moving into the property but you must move in for that six months sometime in the first year of ownership.
It seems a bit odd that one is 6 months and one is 12 months.
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