[KennyjaizMember@kennyjaizJoin Date: 2009Post Count: 69]

May 20, 2010 - 6:56 am

You can try:

http://www.onthehouse.com.au/
http://www.realestate.com.au/sold
http://www.domain.com.au/?mode=sold
http://www.domain.com.au/Investors

Obviously paid data will give you more comprehensive information.

Best of luck
Kenny

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May 14, 2010 - 6:12 pm

Don’t think it matters what you choose to do. There’s certainly no right way or a wrong way of doing it.
As long as the spending is justified with a great ROI, then it’s money well spent.
I tend to look at the results, not the means.

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May 13, 2010 - 5:35 am

benno79 wrote:

Kennyjaiz wrote:

The "love and affection transfer" portion is really to minimise the Stamp Duty payable, when changing the title deed. If the point of the exercise is to maximise the tax deductibility in the future, then it will depend on the partner/wife's ability to get a loan to refinance the property. Since we are talking about disposing a PPOR with CGT exemption, it may be best to refinance it as much as possible while minimising unnecessary transactional costs. However, it will be unlikely the bank is willing to lend >105% of the property market value. Also, remember to do a valuation (or at least 3 REA quotes) for evidence to reset the cost base when changing over from PPOR to IP. However, do take into the consideration the tax deductibility will be transferred to the partner/wife with this scenario. Whether or not this is the best outcome, will depend on the partner's income, objectives, the alternatives and the total cost of this exercise.

it may be best to refinance it as much as possible while minimising unnecessary transactional costs.
But if you simply refinance, you are limited to purchasing investments with that refinanced amount?

remember to do a valuation (or at least 3 REA quotes) for evidence to reset the cost base when changing over from PPOR to IP
Could you expand on this point a little more please?  Why is it important?
Thanks

Sorry Benno,
I’m not entirely sure what you are asking: “But if you simply refinance, you are limited to purchasing investments with that refinanced amount?”
What I was trying to say – once you have changed the title, you can refinance the property with the bank under a different loan structure / name. If the intention is to use this property as an investment property to generate income, then the mortgage interest is likely to be deductible. So if the exercise is to maximise your tax deductibility, then one would maximise the amount that can be borrowed for this property (e.g. if the property is valued at 500K, then you may want to refinance the property at $500K or even $525K, if the bank is willing to). After paying off the previous loan amount, you are free to spend/invest the proceed elsewhere, and the mortgage interest on the $525K will be full deductible.
So to take your question literally, Yes. The income tax deduction is limited to the mortgage interest incurred for the loan used to refinance the property. This deductibility remains regardless of how you spend the proceed (investment or private use) in this particular instance.
To avoid confusion, i should elaborate:
In order to claim a income tax deduction on an investment property, you need to demonstrate nexus (i.e. a connection) between the income generated (i.e. rent) and the expense incurred (i.e mortgage interest). However, sometimes people do a top loan for personal reasons (e.g. to buy a car/yacht). Mortgage interest on this top up amount is normally not tax deductible, because there is no nexus on the income generated.
In the “love and affectionate transfer” scenario, the whole refinanced amount is considered used to acquire this Investment Property (previously PPoR), hence, the mortgage interest will be tax deductible, when the property becomes available for rent.

When you change the PPOR over to IP, the property is no longer CGT exempted. So when you eventually sell the property, you will be required to pay CGT. And in order to calculate the capital gain or loss, you need to determine the cost base. A bank/professional valuation or 3 REA quotes will be sufficient for the ATO. If you don’t have that as evidence of Cost Base, then the ATO will be likely to rely on Local Government estimates (on your Rates statement), but it may not be in your favour as local council usually understates the property value, hence a lower cost base and consequently a higher capital gain.

You should check with your accountant.

[KennyjaizMember@kennyjaizJoin Date: 2009Post Count: 69]

May 13, 2010 - 4:39 am

The “love and affection transfer” portion is really to minimise the Stamp Duty payable, when changing the title deed.
If the point of the exercise is to maximise the tax deductibility in the future, then it will depend on the partner/wife’s ability to get a loan to refinance the property. Since we are talking about disposing a PPOR with CGT exemption, it may be best to refinance it as much as possible while minimising unnecessary transactional costs. However, it will be unlikely the bank is willing to lend >105% of the property market value. Also, remember to do a valuation (or at least 3 REA quotes) for evidence to reset the cost base when changing over from PPOR to IP.

However, do take into the consideration the tax deductibility will be transferred to the partner/wife with this scenario. Whether or not this is the best outcome, will depend on the partner’s income, objectives, the alternatives and the total cost of this exercise.

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May 13, 2010 - 3:20 am

Ah Gotcha. I agree

Great info btw. Thanks.

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May 13, 2010 - 1:29 am

sotiris wrote:

Hi All

I am a new member and seeking some advice if I may and thank you in anticipation for any repies.

I recently went into a business venture, primarily for my daughters, which went bad and I lost a considerable amount of money. In doing so, I tendered my resignation to the company I worked for as a well paid consultant and am currently unemployed.

I am 65 yo with the following assets;
  
Home – value $1.65m 
Investment property – 50% ownership – $375K (mother lives in – no income)
Shares/self managed Super fund – $500k
Personal assets – motor vehicles/personal/furniture – $80k

Liabilities – nil.

Currently will be drawing $3k month from self managed super fund and my wife works part time with a small income of $25k per annum.

Is it a lost cause at this stage of my life, and given my current circumstances, to consider using what equity I have for an Ivestment Property? I think not having a regular income could be a problem????

Thank you all for any advice
   

Hi Sotiris,

I have to agree with J900, it is quite an acceptable position. Having a chat with a qualified financial adviser can potentially maximise your investment returns. I think it’s important to work out your personal circumstance (current and future), your investment objectives and requirements (current and future), risk profile, etc (a financial adviser can probably help you with that). Then you can consider how you can investment your money. At 65, I assume you would prefer more conservative investments? There are many things you can do, especially you have an SMSF and retired!

You may consider unlocking the equity (via LOC or downsizing) your existing home, and use that to invest conservatively in properties.
One of the issue you face is the lack of income and hence serviceability for an investment property. You may consider cash flow positive properties?
You can also consider contributing to your SMSF and purchase properties within your SMSF.
There are many ways to skin a cat!

So no, not a lost cause! Another chapter in your life, and I think you owe it to yourself to enjoy your retirement.
Best of luck
Kenny

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May 13, 2010 - 1:20 am

Sorry Mr5o1,

Slight clarification.
Disposal of any CGT assets, is considered a CGT event.
However, despite the CGT event, main residences are exempted from Capital Gains Tax.

I’m a bit confused re your comment about moving out of a main residence to renovate…
What do you mean?
Do you have any literature on this?

Thanks
Kenny

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October 15, 2009 - 12:41 am

MsTrump,

I don’t think I will need to get into any technical info of tax as other people on the forum has done a fantastic job. I understand you are frustrated by the fact that your potential profit maybe reduced by tax implications. However, there is no need to convince you that people are happy to pay taxes – it is a necessarily evil and an obligation in return for the privileges we get from living in this country. Whether or not you think the government is efficient in spending our money – or if it is fair – is irrelevant. Unless of course, you are lobbying to get the tax law changed.

The fact of the matter is, when you undertake an activity to generate income and as long as it satisfy Div 6 of ITAA, you are required to pay tax. There is no difference between you trading real estates and a single mum running a home business making hand-made jewelleries. The ATO does not interfere or help any business owner or employee in their day to day work.

There are ways to minimise tax, but no way of completely avoiding it if you choose to be a tax resident of this country (you pay GST when you buy groceries). However, take comfort in knowing that you only pay income tax when you have made money. Whether or not it’s worthwhile is up to you to assess.

The logical thing to do now, is investigate what are the tax implication if you intend to develop on a regular basis and under what structure. You may find tax advoidance is not the way to make money.

Good luck with the development
Kenny

[KennyjaizMember@kennyjaizJoin Date: 2009Post Count: 69]

October 6, 2009 - 10:57 pm

thematrix,

The 6 year rule is also known as the Absence Rule under ITAA s118-145.
If an individual is absent from their main residence they can still treat it as their main residence where:
1, it is used for an income producing purpose – up to 6 years; and
2, it is not used for that purpose – indefinitely.

If you are not absent from the property you may not be entitled to the exemption. So if you rent out part of your home, the 6 year rule may not apply. Instead your CGT exemption is likely to limited to the part of the PPOR you use privately. If this is the first time you have earned income from your PPOR it will cause your cost base to be reset at the market value at the date it first started earning income (A couple of Real Estate Agent documented valuations will probably be sufficient). This can be the case even if you are just renting out a room in your home.

Hope that helps
Kenny

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October 6, 2009 - 2:56 am

thematrix,

Agree with crj.

If you subdivide part off to sell, you may find this helpful:
http://www.ato.gov.au/individuals/content.asp?doc=/content/36907.htm

Cheers,
Kenny

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October 5, 2009 - 9:28 pm

Adski,

With situations like that, it is important to do your research, and document all the communication with your landlord. As you have already done.
Also, it may be beneficial to document all the improvements you have done to the property.
You will probably find the authorities (Fair Trading and Consumers affair Vic) sympathetic towards your situation.

In additional to what is mentioned in the RTA/Legislation, is your Residential Tenancy Agreement you have with your landlord. Go through that with a fine brush and see if there is any clause prohibiting or allowing your landlord to:
1, raise the rent substantially during the lease and
2, kick you out before the lease agreement is terminated without mutual agreement.
In the absence of these factors clearly stated in your lease agreement, RTA and TPA (Trade Practices Act) should kick in to prevent the landlord from increasing unfair rate increase during an existing agreement. However from memory, you will need to apply to the authority and the tribunal for remedy and assessment.
Depending on what is stated in your lease agreement, I would have thought your landlord will be breaching the contract by issuing you with a 120 day notice before the lease is up?

It sounds like your landlord is not employing the service of a Real estate agent as property manager. It is unfortunate that there are cases where the landlord is not that educated and maybe driven by greed, or sometimes desperation. I know it doesn’t help you with your situation, but take comfort in knowing that you have done the right thing. I don’t think I would have done anything differently to be honest (except wait for the formal written notice to put the rent up, before letting her know about the RTA). But I wouldn’t sabotage the property, there is no need to bring yourself down to her level, but do take the dishwasher with you
I personally would be more than happy to have you as a tenant, as clearly agreed by other members of the community. Not all landlords are like that.

Good luck and keep us posted.
Kenny

PS. I am not legally trained, just a disgusted citizen concerned for your welfare.

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October 1, 2009 - 9:23 am

Pranay,

If you choose to split the loan into two, the investment portion can include any purchasing cost incurred to acquire the income-generating IP. Typical purchasing cost includes borrowing costs (LMI, loan application fee, establishment fee, stamp duty on mortgage etc), conveyancing costs, stamp duty on the property transfer, etc. In this case, assuming the $74,000 contains no private or domestic component, you can set up a sub-account for this amount and be able to claim the interest as tax deduction, so long as the property is rented or available for rent. Keeping this account at interest only may maximise your tax benefit.

I don’t have enough information to comment on the $125K portion. But if this amount is used to finance the PPOR, then it is of private nature and will not be tax deductible. You may choose to go with P&I to reduce the debt.

Just as a side note, for any interest expenses to be deductible when it comes to investment properties, there needs to be nexus (or relevant connection) to the revenue generated (ie rent). If you start taking additional loans out to pay for mortgage interest incurred to finance the IP, you will start to lose the nexus between the additional loan interest expense and the revenue generated.

Hope it helps,
Kenny

Note that comments made on this forum are of general nature. You should consult with professionals before taking action.

[KennyjaizMember@kennyjaizJoin Date: 2009Post Count: 69]

October 1, 2009 - 6:37 am

Hi Matt,

This site gives you up to 36 months:
http://www.investsmart.com.au/property/default.asp?s_cid=domain
It’s just the “Invest” tab on the domain.com.au site.

I find there’s a time lag of the data presented on this site though, so be aware when using this site.

Cheers,
Kenny

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September 30, 2009 - 4:22 am

Sandtrackers,

Before you go through the potentially costly engagement with a REA, you can probably try and gauge the market demand by speaking to Real estate agents as a buyer. (obviously if you say you are a seller, they will hype it up for you). As well as other investors. Just to get a sense of the market direction.

You can also check recent sales in your area:
http://www.homepriceguide.com.au/auction_results/index.cfm?source=apm

If the property is over 650K and rent is under 500pw. The rental return is under 4% and after expenses it’s probably even less.
I’m afraid it is not fantastic return. But again, you just need the one buyer

Good luck
Kenny

[KennyjaizMember@kennyjaizJoin Date: 2009Post Count: 69]

September 29, 2009 - 11:42 pm

Hi Sandtracks,

I agree with S/C.

But to answer your questions:
1, Yes. As property price goes up, you would have built up equity in you home. You can ask your existing bank for an additional loan or go to another bank for a refinance. (There will be costs involved of course) They will do a revaluation of the property to determine how much the property is worth, and how much equity you have. Note that the amount you submitted as your estimation of your property’s market value, may form the cap of their valuation. (even if it may be worth more). Avoiding paying LMI maybe wise (ie up to 80% or 85% depending on lender).

2, The additional loan amount as S/C mentioned, will not be deductible. The nature of the security asset is irrelevant, it depends on the purpose and intend of the loan. The loan is to purchase a PPOR and not income producing. Hence, no.

And if you do choose to sell your first PPOR/ now IP.
3, S/C already said, IPs get sold with tenants in them, and infact it can be a + for a lot of investors if the rent is decent. Personally, I don’t think there is a need for your concern.

4, Depending on the timing of the purchase of second PPOR, you may be eligible for CGT exemptions. You are entitled up to 6 months to dispose (sell) of the first PPOR to acquire the second PPOR and incur no CGT for the first one. You may also continue to elect your first PPOR as the PPOR and apply the 6 year rule. But you can only elect one PPOR at any one time for a family. You will have to access the pros and cons.

Best of luck
Kenny

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September 29, 2009 - 11:15 pm

No prob S/C! I am glad it worked out for you!

To be honest, I just copied and pasted our old post

[KennyjaizMember@kennyjaizJoin Date: 2009Post Count: 69]

September 29, 2009 - 1:58 pm

Hi Pranay,

You may find the following link useful:
Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR20002/NAT/ATO'&PiT=99991231235958

Essentially, you have a mixed purpose redraw facility (private portion and investment portion). You can still claim the tax deduction for the interest paid on portion of loan you took out (the whole $74K) to acquire the investment in line with s8-1 as it is. This is stated in the above Tax Ruling:

“15. Where a taxpayer has a mixed purpose sub-account, the interest needs to be apportioned between the income producing and non-income producing purposes. Apportionment must be made on a fair and reasonable basis. One approach that we accept as fair and reasonable in relation to the apportionment of interest that has accrued on a daily basis on a mixed purpose account is set out in the following paragraphs. We accept that this approach to apportionment is not the only approach that is fair and reasonable.”

However the down side of not refinancing your loan to split the private and investment portion is:

“21. Where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility comprises one mixed purpose sub-account only, the taxpayer cannot choose to notionally allocate the repayments to a particular portion of the total debt, e.g., the non-income producing portion.”

What this means, is when you pay P&I on the loan, you cannot choose to pay down the private/non income producing portion first. However, the good news is that the ATO has made an allowance for investors to refinance their mixed purpose account to separate income producing portion and private portion as you have mentioned before:

“Second Exception – Refinancing mixed purpose debt
18. A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.”

I would recommend that you consult with a tax professional before proceeding. It is always advisable to obtain your own private ruling from the ATO before relying heavily on random research, to avoid unnecessary pain further down the track. There is no value in risking misinterpretation.

Best of luck
Kenny

Note that comments made on this forum are of general nature and does not constitute personal advice. You should consult with professionals before taking action.

[KennyjaizMember@kennyjaizJoin Date: 2009Post Count: 69]

September 29, 2009 - 2:06 am

Hi xya,

I agree with Richard and Terry. (and I have rarely seen them offering anything but useful contributions)

While awsydney’s comments may work on an individual basis, it may not work for everyone.
Accountants are typically not authorised to offer any financial planning advice unless they are registered and comply with RG146. This will apply to awsydney and the author of the book you mentioned. Their recommendations should be treated as experience based and not expert opinions.

1, PPOR using P&I vs IO
Mortgage Interest paid on holding a PPOR is not tax deductible against your income. Tax accountants will probably recommend that you pay it down as quickly as possible to reduce level of debt as a Tax professional. However, this is not always the best option for everyone in terms of investment strategy. Having to pay the P in addition to I, as Terry said will mean you have less disposable income and less opportunity to hold more investments at the same time. It depends on your circumstance and your risk appetite.
I have not read the book you mentioned, however if the author offers a comparison between the two options and the method of comparison is logical, then it may work.

2, If I have plans to upgrade my PPOR in a few years time from my current apartment to a house, and turning the apartment to an IP, would that then make more sense to have the PPOR loan as a IO?
Richard’s recommendation may work best for you in this case. IO with 100% offset.
Because any interest paid in order to generate income is tax deductible. This option (IO + offset a/c) should allow you to deduct the whole amount when you are ready to upgrade.
However, if you initially paid the loan down for your PPOR, and later covert it to an investment property, and take a second mortgage to purchase a different PPOR – interest paid on this additional loan amount will not be tax deductible.
You should be aware of CGT implications in order to make the best decision.

Best of luck
Kenny

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September 29, 2009 - 2:01 am

Hartfam,

Steve’s strategy is primarily +ve cash flow based, which may not be what you are after, if your objective is tax minimisation.
However Steve can give you insights and idea that will be beneficial regardless of your strategy.

your financial planner should be able to come up with a plan that suits your personal circumstance.
Besides strategy, you might want to ask about the optimal structure to “house” the investment and their pros and cons. (ie Individual, Company, Trust, etc)

In terms of where to invest, this was on the news the other day:
http://www.news.com.au/perthnow/story/0,21598,26084162-5013244,00.html

Best of luck
Kenny

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September 29, 2009 - 1:09 am

Hi will,

I think a lot of the bears in the property market have something to be concerned about. There is a high level of national debt in Australian and housing affordibility is sliding with artificially inflated price by government grants, which brought forward a lot of first home buyer’s decision to get into the market. Their research are valid and economically sound – depending on who you listen to. You have to educate yourself to distinguish it from sensationalised media as Marc mention.

The reason I ask is, your topic mentioned a depression. Depression is defined as recession for extended period of time usually more than 3 years. I sincerely doubt Australia will be in that stage anytime soon.

Regardless, lets assume we are in a depression.
I agree with your assessment regarding property prices.

I disagree with the debt of $500k on paper is worth $100K and furthermore I am not sure what you mean by “leveraging our buying power through gold and silver”
A debt of $500K to the bank will always be a debt of $500K to the bank regardless what money is worth. You are only obliged to repay $500K at the end of the day, regardless if the Dollar can purchase more or less or the same basket of goods. Now, you maybe right in that the security asset for the bank (ie your house) is now worth $100K. But your debt is still $500K and you are still required to make repayment on $500K. Typically in a depression or a recession scenario, the sentiment is to reduce the level debt and reduce investment. Because the amount of money will not be able to get you the same basket of food. A typical household with the same earning income before recession/depression will have less money overall due to the higher prices of other necessities. It will be difficult for them to finance their properties, and hence the increase in defaults. So I would say that debt will not be a great thing at that point, even if you can sustain it. (esp is you are a Prof Keen follower)

I suspect during a depression, property price will be significantly reduce. The demand will not make a substantial difference with the reduced property price at that stage. It’s only when the economy goes back into recovery that you will see property price starts to pick up.

My assessment and it is only my personal opinion, is that the property price will increase by between 5-10% in the next 12 months in line with normal demand.
As long as interest rate stays relatively low (~>4% rba cash rate), unemployment stays relatively low (~>6.5%) and there is no over supply of housing, and the net immigration and population growth will probably sustain the demand in the cities in the east coast. Resource productivity will probably sustain the west coast.

Note my position. I’m a active property investor (not speculator). I have properties and I buy properties. So property price going up both benefits me and harms me. But i guess my biasness is still towards bullish.

Cheers
Kenny