Forum Replies Created
Lil,
I would redraw the 10% deposit and split your loan (if your loan product allows splitting) into the 2 subaccounts. The 10% deposit as one sub-account and the remainder in another subaccount.
The interest expense from 10% subaccount will be all tax deductible while the interest expense from he other subaccount not tax-deductible.
In fact, if you have sufficient capacity, you should also redraw more for the stamp duty on the IP plus legal fees and other fees on the new loan. All those costs can be lumped into the 10% deposit subaccount and the interest expense on this subaccount will be all tax-deductible.
Hi Terry,
I like your idea of having the LOC pay for the IP running costs (including interest of the I/O loan) and thereby increasing your tax deductible LOC liability over time while at the same time the I/O loan for the IP remaining the same balance and the offset balance increasing over time.
Do you recommend using the investor's salary/other income to pay for the interest payable on the LOC or use money from the offset account? If using the offset account money to pay for the LOC interest, the offset account will not increase as quickly (depends on the relative amounts of the rent income versus LOC interest – these 2 competing forces can either increase or decrease the offset balance over time).
Also, gotta be careful of Part IVA, because any loan arrangement with the "dominant purpose" of obtaining a tax benefit will not be favoured by the ATO. Have to argue this arrangement have another dominant purpose other than tax benefits
Hi Dan42,
Continuing our conversation on this matter, the following ATO PBR is pretty much the same situation as "Stage's" circumstances. i.e Property was purchased after Aug 1991, was let out immediately after purchase, become PPOR for 2 years and then was rented once again for several years.
This PBR confirms that the interest costs an (rates, land tax etc) that were NOT claimed as a tax deduction during the PPOR years can be added to the cost base for CGT purposes i.e as 3rd element of a CGT asset.
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/79884.htm
Dan42,
I didn't say the holding costs (interest, rates) etc were to be claimed as a tax deduction. I said you can add it to your cost base and hence reduce CGT payable.
"One trick that a lot of people don't know is that during the the holding costs during the PPOR years when you did NOT claim tax deductions on can be added to your cost base (increased cost base reduces your CGT). Holding costs includes interest on home loan, rates, strata, insurance etc etc."
Stage,
Your property won't be able to use the 6 yr absence rule since it was rented out as soon as you purchased it. Living in it for the last 6 months prior to selling it won't make the place a main residence for CGT exemption purposes.
One trick that a lot of people don't know is that during the the holding costs during the PPOR years when you did NOT claim tax deductions on can be added to your cost base (increased cost base reduces your CGT). Holding costs includes interest on home loan, rates, strata, insurance etc etc.
SO you kmight find the $30k CGT might be knocked down quite considerably from these holding costs that can be added to your cost base (especially if you paid a bucket load of interest during those 6 PPOR years)
Investajt,
One thing you can do is get a Line of Credit facility and borrow up to 80% LVR of your existing property. Split the facility into 2 subaccounts. One subaccount for investment purpose and the 2nd subaccount for PPOR purposes. You will be able to claim interest on the investment subaccount only but the interest on the other PPOR subaccount will not be tax deductible.
Here is a numerical example. Say your existing property is worth $400k. You said you have equity of 46%, which implies your LVR is 54%. 54% LVR for $400k property is a loan amount of $216k. You can refinance to a LOC facility to 80% LVR, taking your loan limit to $320k (80% of $400k). So you have an increase in borrowing capacity of $104k ($320k – $216k). So you split the LOC into 2 subaccounts: $216k for the exisiting property to be rented out and $104k as deposit for your new PPOR. The LOC will calculate the interest on the 2 subaccounts separately so you will be able to claim interest on the $216k loan and the interest on the $104k loan will not be tax deductible.
At least this way you are able to claim tax deduction on most of the interest on your LOC facility. But more importantly you will have $104k CASH for your deposit for your new PPOR. That is release equity without "tainting" your investment loan.
You can actually increase the investment subaccount over time while paying down the PPOR subaccount.
Hi 4lex,
Depending on the financial goals you are aiming to achieve and your appetite for risk, there a number of ways you can approach your property investment strategy. You can earn a financial return from IP's from either rental income or capital gain. It is the latter approach that the tax system is legislated to benefit the most from.
While acquiring and holding a positvely geared property will earn you a financial return from day one, this investment approach typically involves owning properties that don't appreciate in value as quickly as "more" negatively geared (or possibly cash-flow neutral IP's). I could have look at your spreadsheet to check if your assumptions are reasonable or if you missed any components in your financial model. Perhaps your model hasn't factored in depreciation as a tax deduction yet.
Based on the introduction you have provided, I can see you can benefit from the 6 year absence CGT main residence exemption for starters. This exemption is a pretty good one to use for your first property. But the key thing is to make sure you resist the temptation to rent it out straight away……you must establish it as your main residence (to be eligible for the FHOG, you must live in it for 6 months anyway). After the living in it for 6-12 months, you may move out and rent the place out. You can rent it out for up to 6 years and if sold within 6 years, any capital gain will be CGT free (provided you do not own another property in Aust).
I've written an article on this topic which I can PDF to you if you wish. It contains a numerical example that you can follow.
god_of_money wrote:Kevin,What is your suggestion if the PPOR has been paid off prior to renting out??
GOM,
In Hsingh's case, it is probably not a realistic situation for him/her to have their loan fully paid off as he was a FHB only 2 years ago. Not many ppl can pay off the loan of their 1st home in 2 years!
But if we continue with your hypothetical situation, and the PPOR loan is paid off prior to renting out, then that person should be congratulated on owning an IP unencumbered (i.e no more loan to service). He/she would be in an enviable position to consider their refinancing options using their equity to suit their circumstances and/or risk profile.
Hsingh10,
I would get a QS report asap to work out how much depreciation you may claim each financial year. Then I would look at getting landlord insurance to insurance against loss of rent and/or tenant damage.
I recommend you structure your loan repayments to be Interest only. There's no point paying off principal on an investment loan. If you really have to park your excess cash anywhere, I would setup an offset account linked to your investment loan so to preserve the principal on your investment loan.
BB8,
Shopping around, looking for the lender that offers 0.1, 0.2, 0.3….% rate lower than other lenders is a waste of time as far as I'm concerned. Sure you might save a little interest but if structured and "used" incorrectly, you loan will cost you much more and cause you to pay more tax than you have to.
I agree with Richard in that you may have underestimated the value a GOOD mortgage broker can offer over staff at bank branches…………..a good broker that properly structures the loan in the correct manner and advising you how to "USE" the loan in the most tax effective manner saves you MUCH more than a small discount % in SVR
It makes no sense to pay down your principal with a P&I loan and then have the property rented out after 6 months…….here's a tip that most bank branch staff won't give you….think about PRIORITISING your cash outflow……..an interest only loan is not a cynical product conjured up by Banks to ensure their customers indefinitely maintain a large loan principal……it is a loan feature that all serious property investors insist on having (coupled with an offset account of course)
Yes its important to minimise your expense by seeking the cheapest loan rate….but as you have mentioned…..the rate changes amongst banks are not consistent and today's cheapest lender may not be tomorrow's cheapest lender….you would be better off spending your time seeking to understand the difference between a redraw facility from an offset account and having your loan structured properlyGood luck with your hunt for the best loan that suits you
While there are certainly benefits in fixing your home loan rate (e.g certainty in your interest expense and potentially paying less interest than you would under a variable rate), one must not forget that you lose flexibility in your property investment/ownership decisions (Or at least it is going to be very expensive).
What I am referring to is the break cost fees to exit a fixed rate loan before the fixed term ends. We've all heard of stories of borrowers trying to exit fixed rate that they have locked in at 8% or so last year and how they have to cough up thousands of $'s in break costs fees if they want to refinance.
So you would have to be very certain that you won't need to sell or refinance your loan in the ext 1,2,3….5 years. There could be numerous reasons why a borrower would need to sell or refinance…….job loss, divorce, job relocation, your business needing extra cashflow from equity in yhour property, receiving an offer to buy your property at a price too good to refuse (which is not uncommon for under $500k property during this period of FHG $14k-$21k madness)……..These types of events can happen when you least expect it……
So just keep in mind the flexibility issue when considering fixing versus variable and not just look at which option costs you less in interest expense.
Hi LGBW,
Since your Broker advised that you don't have enough borrowing capacity to purchases another IP, you should perhaps consider renting out your current property and then yourself live an another rental property.
That way you can claim tax deduction on the interest on the mortgage you are servicing (in addition to the other running costs plus depreciation if applicable). To help reduce the rent you will have to pay your new landlord, perhaps share a place with a mate or 2. Of course there are lifestyle issues to consider such as the pitfalls of being a tenant and the potentially high rent that landlords are charging these days. That's something you have to weigh up against the financial/tax benefits of moving out.
This will enable you to repay your home loan faster and build up equity in a few more years (ideally you should dump all your salary, rent etc into an offset account and pay off interest only on the home loan using proceeds from the offset account).
Another benefit of this strategy is that you will not have to pay capital gains tax when you eventually sell your current property for a profit (provided that you sell it within the first 6 years of renting it out). The key thing is that you lived in the property first, as opposed to renting it out straight after you bought it. You've established it as your PPOR – I presume you needed to do that to not get disqualified from the FHOG.
You've done the right thing so far by buying a property a couple years back and manage to knock down some of the home loan balance. You can accelerate that process by converting your property to an investment one.
Kev2008,
Probably the most important thing to keep in mind when renting out your place is to ensure the loan principal owing on your investment poperty (i'm assuming you've got a geared IP) is and continues to remain as 100% investment related.
In other words, ensure the purpose of the original loan drawdown and subsequent redraws/drawdowns are for investment purposes only and not tainted with private purpose (such as drawing money out to pay for holidays). It will save you a lot of accounting fees to keep your IP loan "clean".
I've seen really mucked up LOC that people use for both IP and private purposes.
A home loan that features an offset account is preferable to a LOC or redraw facility, in this regard.
Hi Not so Lucky,
I'm assuming your $53k deductions is made of your figures of $25k interest + $10k bills+ $18K "negative gearing"
Firstly, the $25k interest sounds a little high for $400k property. You'd be lucky to get a loan with 95% LVR so I;m assuming a LVR of 90% on the $400k loan with 6% interest rate. This gives you 90% x $400,000 x 6% = $21,600. But as we all know you can get a home loan with rates closer to 5% these days.
But $10k in other bills is a litle too high (unless you are expecting to pay $6-8k p.a in Body corporate fees of a fancy complex with common facilities like swimming pool, top class secuirty, 5 star hotel like lobby etc). $5k in body corporate, agents fees, council rates etc is more reasonable.
Not sure what you mean by the $18k in "negative gearing" deductions. I think you are getting confused with the tax loss that property investors nromally incur. The negative gearing loss is a result of the rent minus expenses. You are double-counting your deductions if you combine tax loss (made up of rent minus expenses) with expenses.
So excluding depreciation deductions, around $30-35k p.a in deductions is a reasonable estimate for a $400k IP but $53k + depn of $10-15k p.a is far too high in my opinion.
I haven't seen a specific amount or percentage that could apply if you overestimate your deductions.
But I have seen on the variation form that if you lodge a variation and you end up with a tax liability (as opposed to a tax refund), the ATO reserves the right to NOT allow you to lodge a variation form for the following tax year. So they can penalise not in terms of fines/fees but by denying you the cashflow benefit of "varying" in future years.
So the morale of the story is be conservative with your estimates and leave a buffer zone to be extra careful. Try avoid estimating so much to the point you run the risk of ending up with a tax liability.
Rambo,
Renting it out in the first 6 months would be a big mistake!
1. You will breach the rules of the FHOG and could be asked to cough up the $24k back if you are unlucky enough to be audited.
2. You will lose the eligibility for the 6 year CGT main residence absence rule (and have to end up paying CGT when you eventually sell the IP).
The extra cashflow for the first 6 months may be tempting but better to live in it to establish it as your main residence first, before renting it out.
Feel free to email me if you want a copy of my article on the 6 year rule mentioned above.
Also in the first tax return, you can claim strata, water rates and council rates you would have paid to the vendor on settlement of the IP. The settlement letter will show the amounts you can claim in the 1st year tax return.
With regards to claiming depreciation of building and fittings, they are certainly deductible during the years of tenancy. But the depreciation claimed must be added back for CGT purposes (i.e reduce your cost base by the depn amounts claimed over the tenancy years and hence increasing your assessable capital gains) when you eventually sell the IP.
Ptykit,
A valuer can provide a backdated valuation – thats not a problem.
Based on the info provided so far, it sounds like you might be able to apply the 6 year CGT absence exemption rule (provided you haven't purchased another property while owning this property). In that case, you can sell in 2010 CGT free and a backdated valuation is not required (and don't need to spend your money on a valuation).
I'd also be careful of the Land Tax implications.
You may cop a land tax assessment (i.e losing the main residence land tax exemption to some extent) due to claiming occupancy home office costs in the tax return.
The ATO and Office of State Revenue do sometimes corroborate taxpayer's information.
So consider both the CGT and Land Tax implications before claiming home office occupancy costs
Kvkr,
Any decent Quantity Surveyor can knock up a report for you that summarises how much you may claim each financial year.
It will cost you approx $500 and the cost of the report is tax deductible as well
