I'm a current property investor living at home with the folks but am ready to take the plunge and finally move out! But I have 2 main questions to ask:
1. My parents purchased some vacant land in the 1990s and included my name in it. Then in 2004, I bought my own investment property… so I've always thought that I wasn't eligible for the First Home Owner Grant. But after some research, I've discovered that I might be eligible afterall considering that i) there is no property on the vacant land, and ii) I've never lived in my investment property. Would this be correct?
2. I'm single, earn around $60,000 a year (of which I don't spend much), owe about $185,000 on my current investment loan, and am now wondering whether it's a smart idea to get another loan and purchase a cheap studio apartment (under $200,000) to live in (and potentially get the First Home Owner Grant). I've managed to pay off $100,000 off my investment property loan in a little over 4 years and at that rate, could potentially pay it off in 5 years with the interest getting lower as I put more in. BUT, if I go and get another loan of $200,000, then I'd be paying a hell of a lot of interest so it would hardly leave much for extra repayments. So am wondering whether people think it's a good idea or if there are any alternative solutions/suggestions?Hi
1. I think you may be eiligible for the grant, but may not be for the stamp duty exemption
2. You should never pay anything off of an investment loan, but place all money in a offset account. So you save the same interest, but still have your funds available without adverse tax consequences. Once your IP is paid off you will be paying tax on the rent and will need a high loan, which won't be deductible, for the new owner occupied property. A double whammy of pain.
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
- I have owned an investment home previously. Can I still be eligible for the grant?
A person is not eligible if they or their spouse (including de facto spouse) has had a relevant interest in any residential property in Australia prior to 1 July 2000, whether they live in it or not.
However, a person may be eligible if they or their spouse (including de facto spouse) has only ever had a relevant interest in any residential property in Australia on or after 1 July 2000 and they have not resided in that property for a continuous period of at least six months.
- Direct quote from
- http://www.osr.nsw.gov.au/benefits/first_home/faqs/fhogs/eligibility/
© State of New South Wales through the Office of State Revenue' on all uses.
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Terryw wrote:2. You should never pay anything off of an investment loan, but place all money in a offset account. So you save the same interest, but still have your funds available without adverse tax consequences. Once your IP is paid off you will be paying tax on the rent and will need a high loan, which won't be deductible, for the new owner occupied property. A double whammy of pain.Thanks, sounds like excellent advice.
Could you expand on "still have your funds available without adverse tax consequences" for me?
By "Once your IP is paid off you will be paying tax on the rent and…" are you suggesting to manage the amount borrowed against the IP (by the amount in the offset account) to incur sufficient interest to cover the amount of rent and hence avoid any additional tax? (I'm somewhat naive)
Cheers.
That's some great advice…something I'd never even considered. However, if I don't make any extra payments into the loan, then the interest amount will remain high (which is great for the offset account) but then it also means that my minimum monthly mortgage payment wouldn't reduce the loan by much since most of it would be eaten up by the interest. But I'm guessing that it's something well worth doing if I were to get a 2nd loan for a place to live in as I could then pump the surplus money into that loan instead right?
Mr Obvious wrote:Terryw wrote:2. You should never pay anything off of an investment loan, but place all money in a offset account. So you save the same interest, but still have your funds available without adverse tax consequences. Once your IP is paid off you will be paying tax on the rent and will need a high loan, which won't be deductible, for the new owner occupied property. A double whammy of pain.Thanks, sounds like excellent advice.
Could you expand on "still have your funds available without adverse tax consequences" for me?
By "Once your IP is paid off you will be paying tax on the rent and…" are you suggesting to manage the amount borrowed against the IP (by the amount in the offset account) to incur sufficient interest to cover the amount of rent and hence avoid any additional tax? (I'm somewhat naive)
Cheers.
Hi Mr
When you pay down a loan it can be 'dangerous' as the money cannot be withdrawn without tax problems. It is good to save interest, but can hurt at tax time. better to show you by an example.
eg. You have a $200,000 loan on the investment property while you live with your parents. You save like mad and pay this off totally. You may get $10,000 pa in rent, but since you have not interest to deduct, you will be positively geared, ie making a profit. Maybe $8000 per year, assuming $2000 in other costs and no depreciation. If you are on the top rate, then you may pay $4000 in tax.
Now say you go out and buy a property to live in, assume $200,000. All your cash is locked up, so you need to borrow $200,000 to get into this property. You will be paying around $16,000 pa in interest, and this is not deductible because it is an owner occupied property.
So you are paying $4,000 in extra tax and $16,000 in interest = $20,000 pa
Instead of the above, suppose you had a $200,000 interest only loan for your investment and had a 100% offset account attached. You placed all spare income into the offset and nothing into the loan, so eventually you had $200,000 on the loan and $200,000 in the account. You would be paying no interest at all – which is the same as above. Since you are paying no interest, you would be paying around $4,000 in tax on the rental income.
Now, you go out and buy the $200,000 property to live in. Instead of borrowing the lot, you just take it out of your offset account. When you take the money out, you will be paying interest on the full $200,000 loan on the investment again, but this loan is still deductible as the balance hasn't changed. So $16,000 interest on the loan would mean the investment property would mean there is a loss of about $8,000 pa. This may save you $4,000 in tax. So it would cost you $14,000 pa.
The offset method would save you about $6,000 pa.
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
That is some fantastic advice. Thank you very much! Opening the offset account and waiting a little while until there's enough $ in there before getting the 2nd loan sounds like the solution! So if I currently have a minimum monthly repayment for my investment loan of $2,000, does this amount still go directly into the loan or can I choose to have this amount go into the offset account. I'm looking at the "ANZ One" offset account at the moment and the only cost I see so far is a $10 per month servicing fee so I imagine I'd still come out on top by having it.
SS
You would only pay the minimum monthly interest amount into the loan and the rest would remain in the Anz One A/c.
If you are eligible to qualify for the Breakfree Package then their is NO monthly fee on the A/c and you will receive a discount off the variable rate (Of upto 0.7%).
Richard Taylor | Australia's leading private lender
Sydney Sider wrote:That is some fantastic advice. Thank you very much! Opening the offset account and waiting a little while until there's enough $ in there before getting the 2nd loan sounds like the solution! So if I currently have a minimum monthly repayment for my investment loan of $2,000, does this amount still go directly into the loan or can I choose to have this amount go into the offset account. I'm looking at the "ANZ One" offset account at the moment and the only cost I see so far is a $10 per month servicing fee so I imagine I'd still come out on top by having it.Hi SS
Have a look at the prof package as they waive the monthly fees and give you a discount on the rate. You have to be careful with the loans as if you have a PI loan the monthly repayments are generally fixed, so even if you have heaps of money in the offset, you will be paying the same amount each month and it will be reducing the loan. With the IO loans the monthly payment will just be interest and this will vary depending on how much you have in your offset.
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
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