We really need some help in deciding whether to sell the land or the house.
May 2008 – Bought a home to live in (PPOR) for $180 K
Sept 2008 – Bought a land $130 K
With both the purchases, we opted for a loan which has unlimited redraw and repayments but no offset.
Also, both loans are under me and my wife's name.
We did not know the tax deduction implications at that time and hence to save on interest our salaries, bonus,
etc went directly in both loans.At one stage, the outstanding amounts on home was about 65K and on land it was about 60K.
Now we have bought an established home and settling in late June. This will be our new PPOR.
We need to choose between the following two options:
– Convert the existing PPOR in investment property and sell the land
– Sell the existing PPOR and within 2-3 years build a house on the land and convert it to the investment property.
Which strategy is better from the investment and tax perspective?
Any thoughts and advice will be much appreciated.
dehgam wrote:We really need some help in deciding whether to sell the land or the house.
Why do you want to sell ?
If it was me I would sell the land as it is not producing an income and is a drain on your cash flow. However it depends on your reason for selling. If it is to reduce debt and help you pay off the new PPOR loan then it might be good to sell it. As Capital gains tax will be lower. 50 % discount and 50% owner ship so 25% of capital gain is added to each wage assessable income.
If you are selling because of tax worries then it is probably the wrong reason. If your old PPOR becomes an investment property you can continue under the 6 year rule to nominate it as your PPOR for cgt exemption however the new PPOR is not exempt as you can only have one CGT exempt at a time.
Now the land – You can keep it and add all holding costs to the cost base under element 3 of the cost base for capital gain reduction . So when you sell it later or change it to investment you can add on holding costs to cost base. However once you claim holding costs these against rental income you cannot continue adding them to the cost base as you can't do both at the same time. Once a house is built on it if investment property you can depreciate as an expense on the building cost 2.5% p/a and depreciation for fittings and fixtures.
You can redraw to 80% LVR through a line of credit loan for future investment deposits.
Ask yourself is it better to pay 40% tax on profit or to lose $100 in expenses to claim back $40
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