No, debden, she definitely wouldn't pay CGT on the $200K!

What Thomas is saying is that if she sells the property within 2 years of her mother's death, there is no CGT payable, regardless of whether it's rented out now or not.

If she holds it for longer than 2 years, she'd only pay CGT on 50% of the increase in value from the date of death, ie on the excess over $400K. So if she sells in 3 years for $500K, she'd have an assessable capital gain of $100K, of which 50% is exempt, so she'd pay CGT on $50K, which is probably only about $15 or $20K tax, depending on her marginal tax rate at that time.

Hope that helps clarify things!

Regards,

Tracey

Hi, RisingStar!

Just a cautionary note: I'm a little concerned that perhaps you're overly focused on tax benefits. Many people seem to think that a dollar "from the government" is worth ten dollars from any other source! And your questions lead me to suspect that you are in danger of falling into this distorted way of thinking.

You should always make your decisions based on what's the best investment, rather than being overly concerned with tax benefits. I don't go as far as some and say that you should base your investment decision on pre-tax outcomes, but I do think that tax should be just one factor that's considered in the quality of an investment, no more valuable than the potential dollars it represents. Think of this, for example. If you can deduct $10K in depreciation, depending on your tax bracket, this is worth about $3 or $4K per year at most. This is really insignificant compared to the difference between, for example, strong and weak capital growth on the property. This $3-4K represents only 1% on a $400K property…

If all other things were equal, then use the tax benefits to differentiate. But it's exceedingly rare for all other things to be equal; so look at the quality of the overall investment and base your decisions on that.

Repairs: only repairs are deductible, ie fixing tenants' damage. But replacing the carpet with timber floors (or anything other than exactly what was there – theoretically even if you put in a better quality carpet) would be a capital improvement and have to be capitalised, which given that this will be your PPR and CGT-free, is of no tax benefit to you. Tread very carefully here; the ATO is very, very strict about the distinction between repairs and improvements. And given that you've claimed FHOG and rented the property out before moving in, I wouldn't be surprised if the ATO scrutinises your repair costs for this period extra carefully.

Another hint: if you're able to repay so much more than the minimum payments, I recommend keeping the extra in an offset account rather than reducing the balance of the loan. That way, if you decide to move into another PPR later and keep this property as an investment, you can still obtain full negative gearing benefits by simply withdrawing the funds from the offset account. But if you pay down the loan and later redraw it for another PPR, you can't claim the interest on the redrawn portion against your former PPR (now IP).

Congratulations on a great jump onto the property ladder, and best wishes for 2008,

Tracey

In QLD the deposit is whatever you can negotiate; it's part of your offer. I have bought on as little as $500 deposit. Of course, when I'm selling, nobody gets away with that! ; )

Warmest regards, Tracey

Tee hee, SHales, I think you encountered the same "guru" that I did… https://www.propertyinvesting.com/forums/community/opinionated/18815?&page=12#comment-164658

Now, regards your dilemma about whether to buy a boat now. How about HIRING a boat for family vacations? Then you get the use of the boat when you want it, without sinking capital into it and without the hassles of maintaining and mooring it. Unless you're boating nearly every weekend, boat ownership isn't generally worthwhile. To quote a discussion on another forum just this week: "there are two good days in boat ownership: the day you buy it and the day you sell it".

Best wishes,

Tracey

If you're young, have few obligations, and a reasonable income – which it sounds like is your situation – I'm all for being aggressive.

I'd refinance to 95% LVR and look at mortgage insurance as an expense of greater exposure to the market. LMI for 95% of $200K costs you around $3K in order to gain access to an extra $30K – $3K = $27K. If you use that $27K as a deposit on another property, that $3K expense quickly becomes insignificant relative to your future profits from that additional property.

See if you can avoid overly excessive fees on the refinance by staying with the same lender perhaps, and stretch your equity as absolutely thinly as humanly possible, ie as deposits on perhaps 3 or 4 properties, if your borrowing power will allow. The proviso is that the properties should have strong, or at least reasonable, capital growth potential. (And my 2c worth – I'd prefer lower valued homes in fringe CBD areas rather than apartments, but that's just me.) I think 2008 is going to be a cracking year in several real estate markets and you may be kicking yourself if you're sitting on the sidelines watching, with only one apartment in the mix.

If you end up with additional cash in future, yes, I'd always put it in an offset rather than pay down the loan – EVEN on your PPR. Then if you move out of your PPR and want it to be an investment property, you can take all your equity out of the offset account to buy a new PPR and claim a tax deduction on the loan interest.

Yes, I'm very aggressive. "Those who say it cannot be done should not get in the way of those who are doing it."

Warmest regards, Tracey

Hi Matt!

Personally, I prefer homes to apartments as investments. Not so much for the difference in capital growth – which does exist but isn't that huge a deal – but because I like to have more freedom over my investment eg no body corporate! Apartments generally do have higher yields, but as Marc pointed out, this is quickly eaten up by the increased overheads associated with apartments.

$12K is not a lot, but hey, it is something, and if you can get into a property, you'll have made a good start. Unless you live in the property, you will lose your entitlement to the FHOG, but I don't think you should let this sway your decision either way. The FHOG is insignificant in comparison to the other factors that are worth taking into consideration when beginning to accumulate a property portfolio.

If I were in your shoes, I'd be looking to buy a home with the best capital growth prospects that I could afford, and then when it goes up in value, refinance to release additional equity rather than selling, to buy more properties and/or fund any negative gearing losses.

i may as well state openly that I am not opposed to negatively geared property. Many "positively geared property only" investors say that you're "gambling" on the property going up in value, but given the vast history of property prices going back to Domesday, I'd say that it's a gamble with pretty good odds. And your knowledge can steer the odds even further in your favour. If you look at the profits in all classes of property over the past 20 years or more, the vast majority of profits have come from capital growth rather than from rental income. (I own some positvely geared property myself, but that was just a "bonus"; I bought the property for its future potential.) And it's not an "either/or" issue – if you're short on cashflow, buy a few positively geared properties, perhaps with limited capital growth potential, and use those profits to allow you to buy something that may be negatively geared and has stronger capital growth prospects. It's called BALANCE!

Anyway, if you've saved $12K, I'm guessing that you've got at least some free cashflow and a negatively geared property of a few thousand dollars per year isn't going to be a huge problem for you. In which case, I'd be looking at a home in the outer commuter belt of a city with strong growth prospects. I'm thinking some parts of Geelong, the Latrobe Valley east of Melbourne (Morwell), maybe Beaudesert south of Brisbane. (And I'm sure there are others that I'm less familiar with.) You can still buy a house under $150K in these locations.

Then when you experience growth, say from $150K to $180K, you can increase your borrowings again (up to a max of 95% LVR if you're willing to pay LMI, which I think is well worth it if you're equity poor, compared to the cost of being out of the market), and you'll get an extra $28.5K (less finance costs and LMI), say $25K to spend on more property.

Good luck!

Tracey

Good morning, Jimmy. Your tenants are obligated to pay rent for the duration of the notice period, though whether they'll do so is obviously questionable. It's definitely a good idea to have this as part of your negotiation strategy as you outlined.

And I have no personal experience with debt collectors but doubt it would be worthwhile in this situation. If people just don't want to pay, it can be useful, but if they really don't HAVE any money, well "you can't get blood from a stone". And the costs of recovery may approach the level of the debt. It may be more worthwhile to put pressure on the guarantor. Also I'm unsure whether you can do this legally (privacy laws etc), but if they're employed, it may be worth checking out if you can tell the employer. Sometimes a word from the boss can work wonders! (But as I say, make sure you're allowed to do this first.)

With regard to the heritage listing, the rules vary considerably between jurisdictions. Ring the Council and ask them exactly waht limitations the listing places on the property, and whether there's any possibility of having the listing lifted. Some may advise you to just not repair the place and let it become unhabitable, but tread carefully with this – Council can and will prosecute if they can demonstrate that this is your intention. But you may be pleasantly surprised at how helpful Council is if you just approach them and ask what's possible. The worst that can happen is they'll confirm what you already suspect is the case!

Best wishes,

Del, is there any reason why you'd sell rather than refinance?

Unless a property is a fundamentally bad investment – in which case I assume you wouldn't have bought it anyway – then you're almost always better off holding and refinancing than selling. (And I agree with hleung about seeing a good broker, who should still be able to get you a mortgage.) Changeover costs – agent's commission, CGT (or worse, income tax on gains if you're found to be in the renovating business, as it sounds like you are), stamp duty etc – add up if you're doing this frequently. Also, this is an active property-based business, rather than a passive property investment strategy. I should think if you're retired you'd be looking for more passive than active income.

If you're not sure about any of these points, please feel free to contact me personally.