To terryw, I can see that the CG exemption can be a huge benefit but many of the books I’ve read pitch the “never sell” idea as the answer to avoiding capital gains tax on IPs. If we’re not planning to sell anytime soon is there any benefit to be had in putting the property in a trust and claiming the deductions of a normal IP, building a carry-forwardable loss, and allowing distribution of future capital gains? I understand we can do this provided we rent the property from the trust at a commercial rate.)

In answer to your query Richard, Brisbane’s inner west is where we are now and would prefer to stay. I guess the sensible financial approach is to chase the best capital growth we can while meeting our other requirements so that may dictate our choice of suburb to some extent. I note from an article on your website that you’ve got some experience in the area – any ideas on that front?.

To aussieguy2000, I know what you are saying about keeping the money available – if we needed to pull the pin our exit strategy would be to move out, switch the property to a pure investment, and negotiate some sort of nominal split with the in-laws. Does a LOC make this harder to do than would an offset account or does it work out basically the same?

I appreciate everyone’s feedback on the loan structuring – let me repeat what I understand:
* Borrow at 80% LVR, with a split between a LOC and an interest only loan 100% offset account
* Use the offset as our non-deductible personal savings / transactional account
* Use the LOC as our tax-deductible credit card for investment spending, capitalising interest if need be
* To start, we’d set the split based on the amount of contributed equity so for a $1M property with $800K cash you’d end up with a $600K LOC and a $200K IO Loan with offset (and $200K equity to keep the bank happy).

Am I on the right track?

I gather it’s pretty easy/cheap to swap offset balance for increased LOC limit if we want to, but that moving in the other direction may be fraught with unpleasant tax implications? Or does it not matter because the accounts are still considered separate?

Any there any significant additional costs / margins involved in setting up a facility as flexible as this?

Thanks everyone, I really appreciate your input.

So what I’m getting is that with an investment hat on I should be thinking about it something like this:

* Non-deductible interest charges are bad, but no worse than paying rent
* Any outgoings in excess of current rent payments in this situation are essentially for the purpose of purchasing tax-free equity growth
* To evaluate the value of this it needs to be compared to any other investment made with after-tax money
* Separate to that we would also be receiving a gift of equity which we can leverage to make other investments

What is a sensible estimate for rates + maintenance + body corp + insurance for a property of this value? I suppose it depends on lots of factors, but would $10K be a reasonable ball-park estimate?

If so, Scenario B above could be thought of as a highly leveraged $10K investment yielding ~$54K (~6% on $900K) tax-free equity and no income.

(A 440% return does, of course, make it sound like a very good deal.)

Have I got that right?