What to do?

Thanks for the links Duckster

Hey There,

We went through this choice when we started also. These are the reasons we did what we did.

1) All IP Properties are in one of our names.
– Simplifies Loans and Tax Time.
– Person that earns the most has it in their name.
– As an IP. If you ever sold it, it would incur CGT.
– In the event we decided to sell an IP. We could move the property into the others name
> Spouse to Spouse Transfer of IP is Stamp Duty exempt (In VIC anyway)
> Therein we could transfer it, live in it for a few months and sell as PPOR to avoid CGT.
> There are other rules of course, but nothing your accountant cannot advise you on.

2) We put ALL extra money into the house we live in, and only leave enough money in savings to cover the Mortgage payments and general living. It saves us a heap in non tax deductible interest. in 2008 we had our money in savings and term deposits. The trouble is that the interest gained acts as income, so you end up paying more tax. Putting all money into mortgage is dollar wise more advantageous.

3) I don’t think there is a simple matrix as such. Bunch of stuff floating on the net. I have also created a bunch of spreadsheets that forecast the tax return based on the sum of all properties. Once you understand the math, it isn’t so hard to do. It does however get a little tricky if you want to play with numbers as static spreadsheets are painful and confusing to change frequently. It is particularly not simple because it is dependant on the types of IP you purchase in the first place (for depreciation anyways) for maximum tax deductability.

Things to be aware of for max tax advantages

– Log all tax deductible expenses no matter how out there they are. Your accountant figures out the rest.
> Failing to do this, will see you lose tax deductible dollars, however this number is usually quite low and insignificant.

– Learn about Depreciation, and get a depreciation report done on the house.
> e.g. We have 2 new build townhouse IP’s. Each has depreciation of 12K+ for at least the next 3-4 years.
> Depreciation is money you can deduct without actually spending much.
> In this example. 24K is tax deductible every year without spending a cent.

– Keep detailed track of the money spent on mortgage and the gross income made on the IP. the difference in $ in tax deductible.

– Learn or ask your accountant about the ATO PAYG Variation – All of the above rolled into 1 strategy. this is where if you can forecast the expenses on your IP’s and they are high enough. You can apply for a variation on the witholding tax your employer holds for your pay at work, in which case the ATO forbids your employer from witholding your income tax at payday for that financial year. Great Cashflow strategy.

Hope this helps.

Just shared experiences sir.

1) One name is always simpler than 2. For us anyway.
2) CGT is applicable on all things sold, but CGT is calculated on the basis profit. With transfers, market value is difficult to ascertain, unless an official audit takes place with a standalone valuer. It is equally as easy to shop around for a valuer that values items as lower in this day and age.
3) Spouse to spouse transfer – I checked with 2 convenyancers.
NSW – http://www.lpma.nsw.gov.au/about_us/faqs/paying_stamp_duty_on_a_transfer

VIC – http://www.sro.vic.gov.au/sro/SROnav.nsf/childdocs/-98E8944DC5A0C753CA2575D100047764-62AE8FFFC6A03A7ECA2575D100049B29-D9EB851E6C3D0A65CA2575D1002B2AEB/$file/DutiesForm09.pdf

This is VIC application form for transfer of land between spouses. Nothing suggesting PPOR ONLY

No Offence Richard, but I would tend to take the advice of a legal conveyancer over a financial advisor on this matter, and by all means check with your conveyancer Legal yourself. I would dearly like to know the outcome..

4) Dropping money PPOR vs IP Mortgage Offest.
I would agree with you that dropping money into Mortgage Offset would be the way to go ONLY if my PPOR was unencumbered and owed nothing, and my income needed to go somewhere to offset interest payments. Unfortunately most of us still have mortgages on PPOR. In this common scenario, why would I opt to put money into an offset account for IP, that reduces my ability to negatively gear the variance as a tax deduction over and above the interest payable on my PPOR where the interest paid has no income tax deduction benefit to me?

I do get where your coming from, in the IF scenario of renting out the PPOR in the future, and I guess the best strategy boils down to whether the investor has this intention to rent out PPOR in the future. But in the meantime of coming to this decision, the interest paid on PPOR is dead money with no practical use other than paying the bank.

I find this advices like this tactical for mortgage brokers breeding fear and confusion so that the mortgages remain high, and commissions continue to be paid.

I apologize for reacting negatively, I am speaking only from our experience only. And I have had some negative experiences with Brokers.

– When we started investing Feb March 2009. 2 Mortgage Brokers told us that our serviceability could not extend beyond 2 IP’s
> We have 4 now. (not including PPOR) I have just gotten approval on the last one last month. Ready for settlement.
> And have planned our next 2 for the end of next year.

– We were also told to put extra income into mortgage offset over PPOR
> We ignored that, and put all money into PPOR
> Last Fin Year, I did the math. We saved much more money in PPOR interest savings, than reducing IP via Offsets.
> The Mortgage broker called us furious, that we had paid down our PPOR below $200K because he stopped getting paid commissions.

– Every Time we went for a new property, the broker gave me a bleak outlook on serviceability and told me it was going to be tough. e
> It took a while to realize that I was being frightened, confused and guided to the bank in thier product range.
> Amusingly the banks were far more upbeat about financing and we always pulled it off.

This is not to say that I hate mortgage brokers. There is a time and place to use these services, and I am sure your wonderful at it.
I am simply sharing experiences as to why advice from this one discipline source has not worked for us.
On the flip side, our first 2 properties, my broker was wonderfully helpful. Beyond 2 however advice became counter productive.

Thanks for the input.

Yes, transfers between spouses in VIC is exempt from s tamp duty
s43 of the Duties Act 2000
http://www.austlii.edu.au/au/legis/vic/consol_act/da200093/s43.html