Hi there
Buying our first investment property, need help to set up in most tax effective way. Need a large loan and advice about best way to structure property.
We currently have the house we live in paid for but the mortgage has not been discharged. We plan to retire to Tasmania in 5-8 years and have just bought a retirement house in Tasmania with settlement due in Jan 2013. The cost of the house in Tasmania is 520000 plus stamp duty of 20000 and 1200 in conveyancing fees. We plan to lease out the Tasmanian property for the next 5-8 years, move to Tasmania and lease out our Victorian property for 2 years until we are sure we like living in Tasmania so we have the option to return if needed.
My wife is a wage and salary earner and earns around 110000 and packages a car which cost 13000 a year. She is 53 and cannot put more into super than 25000 with tax concessions. Her employer and compulsory super take about 18000, so she can salary sacrifice another 7000 a year into super. Thought an investment property might be a better option. I am retired with a super income of 37000 a year.
We need to borrow 520000 minimum to pay for new property although I have 100000 in a super fund in options that I could get back. I am aged 57. Not sure how this is taxed. Should I wait until I am 60 to cash this in?
My initial thought was that my wife should have the Tasmanian property in her name and that she should take out the housing loan. Tasmanian rental income is low, 250 a week and property management fees are high at 10-10.5% and rates and land tax will be about 2300 a year. The property will run at a significant loss each year.
My initial thought was that she should become the sole owner but now I am thinking we should be joint tenants. Am I correct that if my wife has the loan in her name she can claim all of the interest even if we become joint tenant in the property? Would joint tenants reduce her ability to borrow 520000?
Thinking that is she can claim all of loan interest and we are joint tenants then we can share rental income and claim half of expenses each this must be better than my wife being the sole owner, and receiving all rental income and claiming all expenses. Is this correct?
Secondly finding it difficult to borrow 100 percent of property and may have to use part of Victorian property as extra security, which is worth about 500000. If we take out new loan say 100000 on Victorian property and 420000 on Tasmania mortgage will have no problems with finance. Would the interest on the Victorian Mortgage be deductable against the Tasmania property as it is used to finance the Tasmania purchase?
And if it is deductable then should that loan also be in my wife’s name only?
Should I cash in my super get 100000 back, put that into Tasmanian and not have a loan against Victoria property?
Hi Warek
Welcome aboard.
If the property is going to be highly negatively geared (which sounds to be the case) it would probably be worth while having the title either in your wife’s name or a higher percentage of ownership apportioned to her given that she’s the higher income earner.
In terms of financing it, you could access equity in your current property which would act as the 20% deposit plus costs. The remaining 80% would be set up as a second loan.
With this structure, you have avoided using your entire owner occupied property as collateral for your investment property and all the debt will be deductible (that is, while the Tas property is an investment).
Hope that helps.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
warek wrote:Buying our first investment property, need help to set up in most tax effective way. Need a large loan and advice about best way to structure property.Not an accountant or broker so take what I suggest with a grain of salt.
warek wrote:My initial thought was that she should become the sole owner but now I am thinking we should be joint tenants. Am I correct that if my wife has the loan in her name she can claim all of the interest even if we become joint tenant in the property? Would joint tenants reduce her ability to borrow 520000?Deductiibility will be determined by ownership details on titles. Who takes out the loan does not affect deductibiliy. If you add your name to the title and loan then you will probably increase your borrowing capacity due to the extra income you bring to the table.
warek wrote:Thinking that is she can claim all of loan interest and we are joint tenants then we can share rental income and claim half of expenses each this must be better than my wife being the sole owner, and receiving all rental income and claiming all expenses. Is this correct?See my previous answer income and expenses will be apportioned at the same ratio as your ownership states. You may wish to consider some sort of tenants in common arrangement Eg 90/10 or 80/20 split. Your accountant will be best placed to advise you on this aspect of any ownership arrangement you enter into.
warek wrote:Secondly finding it difficult to borrow 100 percent of property and may have to use part of Victorian property as extra security, which is worth about 500000. If we take out new loan say 100000 on Victorian property and 420000 on Tasmania mortgage will have no problems with finance. Would the interest on the Victorian Mortgage be deductable against the Tasmania property as it is used to finance the Tasmania purchase?As Jamie has said you'll be able to set yourself up with a line of credit type facility for deposit and costs. This facility will be secured by your Vic property. As this loan is to buy your Tas property it interest on this loan will also be deductible while the TAs property is an investment property. It is the purpose of the loan that determines deductibility – not the security being used.
warek wrote:And if it is deductable then should that loan also be in my wife’s name only?See above about apportioning costs and income. Once again this is specific tax advice and your accountant is best placed to provide this advice.
warek wrote:Should I cash in my super get 100000 back, put that into Tasmanian and not have a loan against Victoria property?Not a financial planner either but I would prefer to retain as much of my assets (your super in this case) as possible. This is moreso the case while you continue to build a nest egg for retirement. On a similar note you see some advantages by establishing an offset account against your Tas loan and trying to build this up as quickly as possible to reduce interest costs on your Tas loan. Using an offset account also means you have flexibility over these funds when you have finalised your retirement plans.
Hi Warek
Welcome to the forum and i hope you enjoy your time with us.
Certainly not ideal to cross collateralise your loan over 2 securities and setting up 2 separate loans might be preferable.
Given that the property will one day be your PPOR you might want to consider buying the property as Tenants in Common with your wife holding 99% of the shares and you the 1%.
This would certainly aide your serviceability (if this is an issue as without further data it is difficult to assess) and would have very little affect on any loss of Tax deductibility for the years in which the property is rented.
Loan interest would certainly be deductible as the ATO look at the purpose of the loan and not the security in which it is secured.
As i have said before if the lender accepted a pogo stick as security the interest would still be deductible as long as the purppose was for investment.
Couple of strategies i would also use to reduce the interest payable.
Richard Taylor | Australia's leading private lender
Thanks for the replies, and just an update on my thoughts and issues I am still not sure of
Current thinking is as follows, if we buy as joint tenants, better when one of us dies. Income from lease property – all expenses including construction cost write down and depreciation of plant etc woudl be a profit per year of 500-1500 dollars, shared between both at 50-50 split, we may make a profit of 250-750 a year, excluding loan interest.
Still trying to get confirmation that if my wifes borrows the loan in her name only even though we are joint tenants then the interest costs per year will be about 28000, fully deductable against her income. So to my way of thinking she then has a tax loss of 27250-27750 a year and I will have a profit of 250-750 a year. Is this correct?
Not sure what will happen in 5-8 years when we use house as our PPOR with any capital gains tax implications but expect that there will not be a lot of gain.
Kevin
warek wrote:Current thinking is as follows, if we buy as joint tenants, better when one of us dies. Income from lease property – all expenses including construction cost write down and depreciation of plant etc woudl be a profit per year of 500-1500 dollars, shared between both at 50-50 split, we may make a profit of 250-750 a year, excluding loan interest.Still trying to get confirmation that if my wifes borrows the loan in her name only even though we are joint tenants then the interest costs per year will be about 28000, fully deductable against her income. So to my way of thinking she then has a tax loss of 27250-27750 a year and I will have a profit of 250-750 a year. Is this correct?
Not sure what will happen in 5-8 years when we use house as our PPOR with any capital gains tax implications but expect that there will not be a lot of gain.
Kevin
Hi Kevin,
All expenses and income is apportioned according to the names on the titles.
In effect if you buy t he property as joint tenants (which defaults to 50/50 ownership) then that is how all expenses and incomes will be split. You may wish to consider tenants in common which allows you and your wife to retain shared ownership but you can weight the proportions according to your needs. For example 75% wife and 25% you (or what ever your accountant suggests).
As for CGT your Tas property will start to incur a CGT liability from the day you take ownership. This will continue until you shift PPOR status from Vic to Tas. Speak to your accountant about how this works.
You may elect to retain your Vic home as PPOR even after moving to Tas. You can do this for up to 6 years and retain CGT free status on your Vic home. This time frame would suit your 'try Tas before making a final decision' idea and allows you to move back to Vic without affecting it CGT free status.
When you move in you will be able to
Thanks Derek
Derek wrote:warek wrote:Current thinking is as follows, if we buy as joint tenants, better when one of us dies. Income from lease property – all expenses including construction cost write down and depreciation of plant etc woudl be a profit per year of 500-1500 dollars, shared between both at 50-50 split, we may make a profit of 250-750 a year, excluding loan interest.Still trying to get confirmation that if my wifes borrows the loan in her name only even though we are joint tenants then the interest costs per year will be about 28000, fully deductable against her income. So to my way of thinking she then has a tax loss of 27250-27750 a year and I will have a profit of 250-750 a year. Is this correct?
Not sure what will happen in 5-8 years when we use house as our PPOR with any capital gains tax implications but expect that there will not be a lot of gain.
Kevin
Hi Kevin,
All expenses and income is apportioned according to the names on the titles.
In effect if you buy t he property as joint tenants (which defaults to 50/50 ownership) then that is how all expenses and incomes will be split. You may wish to consider tenants in common which allows you and your wife to retain shared ownership but you can weight the proportions according to your needs. For example 75% wife and 25% you (or what ever your accountant suggests).
As for CGT your Tas property will start to incur a CGT liability from the day you take ownership. This will continue until you shift PPOR status from Vic to Tas. Speak to your accountant about how this works.
You may elect to retain your Vic home as PPOR even after moving to Tas. You can do this for up to 6 years and retain CGT free status on your Vic home. This time frame would suit your 'try Tas before making a final decision' idea and allows you to move back to Vic without affecting it CGT free status.
When you move in you will be able to
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