Hi,
I am looking for some advice on where to go next with my portfolio.
I am single and I am an employee.
I bought my first house in QLD in September 2003 for $287,000 and it is now worth about $420,000. I lived in this property for over 3 years and have rented it out since November 2006 and I now owe $200,000 on it.
I bought my second property in QLD in September 2007 for $527,000 and it’s now worth $600,000. I have lived in this property the entire time since purchasing it. I owe $460,000 on it.
Currently, I am paying 6.64% on these loans. The properties are security for each other (will work on changing this soon).
Obviously, my problem is I am paying a lot of tax with no deductions as my rental property is now positively geared and I have a lot of personal debt on the second property which is limiting my borrowing capacity on purchasing further properties.
I am thinking of a couple of options:
Option 1. Can I move back into my first property for some time and rent out my second property and then buy a third and move into the third property. Could I then sell the first property and not be liable for capital gains tax?Option 2. Should I set up a trust and buy the first property through the trust? I am aware that I would have to pay CGT and stamp duty. From what I understand, this would provide asset protection from any future marriage and/or the possibility of losing the asset if I happened to be sued. From my research, there are several different trusts and I’m unsure of which one to use. I assume that I can claim the interest I pay and costs associated with the property on tax, just as you can if the property is not in a trust? What are other things that could catch me out in the future with a trust? I think land tax may be liable after $150, 000 if a property is in a trust but is only liable after $600,000 under an individuals name? I have also read that I can put the capital gains into a cash management account for over 12 months and I would not have to pay CGT.
My long term goal is to keep working in my current career but to have the flexibility to reduce my hours and take some leave without pay every few years to travel. I would like to aim to use my tax deductions to the fullest (currently paying over $30,000 tax per year) and to be able to work 3-4 days per week. I intend to keep adding more properties to my portfolio as time and income allow.
Thank you for any help.
You could probably sell the first property now without CGT.
If you sell your house to your trust there is little in the way of asset protection, especially in the early years due to the clawback provisions of the Bankruptcy Act.
There is also little asset protection with trusts from spouses – even a leading QC barrister and trust expert, Dr Spry, lost a recent case to his ex-wife.
Other than this generally it is only discretionary trusts that provide any asset protection. If the trust owns the property then you cannot claim the tax (as it doesn't belong to you). The trust claims all costs. Also look at land tax issues – these vary from state to state, in NSW you would get no exemption in a trust.
Thats not right about the cash management account either.
I suggest you do some figures on a spreadsheet on selling to your trust. If you do you will release lots of equity which would help you save interest on the PPOR so it may still be worth it. Another option is to leave things as they are and get the next one in a trust.
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
Hi Terryw,
Thank you for your reply. I am only new to this forum but have already read so many of your posts and am blown away by your property investing knowledge!
Was wondering if you could help me further?
When you say that i ‘could probably sell the first property now without CGT’, is that because if i set up a trust, I won’t have to pay CGT or is it because once all the past costs associated with property etc are taken out, it would probably leave me with a very low capital gains?
I spoke to a real estate agent last night regarding my first property and he said houses like mine have been selling for $510,000 recently so that would unlock a huge amount of equity but would need it valued lower if CGT a problem. There is lee way here.
Disregarding asset protection after further research, is setting up a trust going to benefit me when I can’t claim the tax? A friend suggested a unit trust but there are a few different types.
If I do leave things as they are and buy the next one in a trust, how will this benefit me as compared to buying in my own name?
Considering all my options – can i move back into the first property for a period of time and then sell and only pay CGT for the time I was renting it out or have no CGT by nominating it as PPoR when i sell it later? (I would rent property 2 and not move back into it)
I will look into land tax.
Thanks!
I think your first place may qualify as your main residence still. you can be absent for up to 6 years and still be CGT exempt – but you will lose the exemption on the existing property during this time.
If your trust owns the property and if there is a loss than you cannot use this loss to reduce your personal income. The loss will just sit there, rolling over waiting for future income to offset it.
if u are going to sell to your trust the OSR may require a valuation for stamp duty purposes – you can tell the valuer what you are doing and it should come in a bit lower, but on the other hand you will also want a high val to release more equity, this will also reduce CGT in the future when your trust sells.
Unit trusts don't provide any asset protection as the units are property available to creditors. But you may be able to borrow to buy the units in the unit trust and personally claim the interest.
You have to consider the long term benefits of using discretionary trusts – reduced tax, asset protection and estate planning issues. But these days it will cost you more in the beginning.
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
Hi Terryw,
Thanks for the info. I have found out that i won’t have to pay CGT on my 1st property. At this stage it looks like the value is about $500k so I am looking at setting up a unit trust and borrowing to buy units from the trust, and to pay the stamp duty, so I can personally deduct the interest.
I am very close to buying a third property and not sure whether to buy it under trust also?
As I will be selling property 1 as PPoR, property 2 will have been an investment property for the past 3 years, even though I have been living in it. I need to restructure my loan on property 2 as I would like to eventually move out and buy a better house for me to live in.
Any advice on whether I should consider discretionary trust vs unit trust for my property investment plans?
Thanks
Hi M
Thats good news about the CGT. But, may I ask, why would you buy using a unit trust? Did the accountant give you reasons?
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
Hi Terryw,
He hasn’t given me reasons yet as I am waiting to see him. I am trying to get info before hand. He did say that I’d be better to set up a unit trust rather than selling the property altogether and starting again. I am trying to reduce personal debt on property 2 to start investing again
M
Unit trusts offer virtually no asset protection benefits and no tax benefits. But it may be a way for you to convert non deductible debt into deductible by selling to the trust – stamp duty will apply, and maybe CGT too.
You also may be able to transfer the units without stamp duty later on, depending on the state your trust is established in.
It may work for you, just make sure you ask some hard questions and know the facts before proceeding.
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
will do. thanks!
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