We went to see an accountant today to talk about loan structuring, trusts etc.
Ended up with a page of scribble to take home, and I feel as though it was a waste of time. I didn’t actually learn anything, except she said that trusts weren’t worth it ‘cos of land tax and you can’t distribute profits to your children (children are taxed too highly).
All we did was to go home with a heap of questions in our head …Can anyone tell me:
Question 1#
If you build a unit
RENT IT OUT
then sell it in a few months timeWhat portion of the profit do you actually pay capital gains tax on ?
Do you pay on the difference between the valuation of the property when it was first built, and the price that the unit eventually sells for.eg. unit valued at $400,000 on completion, sells for $450,000 6 months later. Pay capital gains tax on $50,000 ???
Or do you pay on the difference between your costs in buying the block/building/expenses – and the price that the unit eventually sells for ?
eg. unit cost $250,000 all up at completion.(land,building,expenses), sells for $450,000
Pay capital gains tax on $200,000 ??Question 2#
We have 2 units (a duplex)- under one normal home loan.
If we rent out one, and live in the other – should we split the loan and have one as an investment loan and one as a normal home loan ???Question 3 #
Is it better NOT to rent out the other unit at all ??
Should we live in one, and let the other one just sit there.
And then sell the one we’re in, and move into the other, then sell it too ???If anyone got to the end of this – thank you !! (whether you know the answers to any of this or not [
]You might want to post this in the finance section but I’ll have a go.
Question 1. I’m pretty sure it’s the second answer. If you keep it for 12 months or more then you only pay CGT on half of the profit.
Question 2. Not sure. Do you mean to have a home loan and an investment home and claim the interest on the investment home as a deduction? You can probably do that without having two separate loans. Someone else will probably give you a better reply.
Question 3. Do the units have separate titles? Why sell either anyway? What’s your motivation? Give us some more info as there are probably a lot of different solutions to whatever situation you are in.
Regards
JudiHi Inna,
1. For a comprehensive answer to your CGT questions I recommend you have a look at the ATO website and read the documents relating to CGT.
http://www.ato.gov.au/individuals/content.asp?doc=/content/31570.htm
2. I suggest you are better off splitting the loan and having two loans.
One for the half you live in – with this loan being P & I and the other (the rental half) being interest only payments to maximise your cashflow.
Such a technique allows you to direct as much as you possibly can towards your ‘home half’ and this overcomes the non-deductible debt attached to your live in half.
At the same time interest only payments will minimise payments being made into your investment property while you focus your attention on the other half.
The advantage of splitting the loans is that it makes tax returns easier, less difficult should you ever be auditted by the ATO and it means you can direct spare cash towards your ‘home’ without having to apportion payments over the whole debt as would be the case if you kept the loans combined.
3.As for not renting out one half.
Seems crazy to me as you have a potential income earning asset sitting idle and, based on question 2, costing you money. If the property is idle it is not earnign an income and as such you will not be able to claim costs normally associated with IPs.
CGT minimisation (if that is your aim) will not be achieved as you are, in the main, only eligible to have one PPOR at any one time.
To give more definitive comments is difficult as there are too many unknowns. Critical to the whole decision making process is what are your long term goals and where do these properties fit into the picture?
As a rule of thumb you are better off hanging onto the properties for the long haul and use equity to leverage into other properties and/or investments.
Derek
Thank you so much for replying Judi & Derek
I feel like a bit of a ditz – I do know about the fact that you have to hold an investment property for over 12 months if you want to only pay on 50% of your capital gain.
Silly accountant didn’t even mention that to us, but it’s something I’ve known for past couple of years.
Forgot to factor it in when posting though !But will look at the ATO site and see if I can find a definite answer to first question. Judi, I’m hoping it’s not the second answer but it probably is !!
Derek – as for hanging onto at least one of the units – I’d love to !! (they’re very, very nice !) – but we don’t want to live there permanently.
The accountant said that we’re better to sell than to rent it out as you’re better sinking your money into your PPOR than a rental house.
(meaning that the rented unit would be grossly positive cash-flow and not negative geared.)This site seems pretty positive re positive cash flow from rental properties. I have read Steve McKnights book and was impressed by ideas.
As far as not renting the second one at all – just leaving it idle for 6 months – we had a friend do this – and apparently it worked out very well.
Made more money than if he had rented out second unit.
Wanted to check it out here though !!Thanks – lots to think about !!
(Oh – long term goal – lots of develop/sell … develop/sell) – if at all possible [:p]
Originally posted by Inna:The accountant said that we’re better to sell than to rent it out as you’re better sinking your money into your PPOR than a rental house.
As far as not renting the second one at all – just leaving it idle for 6 months – we had a friend do this – and apparently it worked out very well.
Made more money than if he had rented out second unit.
Wanted to check it out here though !!(Oh – long term goal – lots of develop/sell … develop/sell) – if at all possible [:p]
Hi Inna,
In the main I believe your accountant is right about getting rid of non-deductible debt from your PPOR.
However (and without knowing numbers here) the two units may provide surplus cash to help pay off the PPOR too – this possibility, and it’s effect, need to be compared to the effect a lump sum payment would have on your PPOR debt levels and also your long term plans.
Your friend made money leaving a property vacant – how much extra would he have made with a tenant? I can only assume there were CGT issues with the property for them to leave it vacant.
As for your long term plans – have you thought about develop (keep some depending on the numbers) and sell the rest to keep debt levels manageable and cashflow working effectively for you in the long and short term.
Be aware that, as a rule of thumb and according to Michael Yardney (an experienced, long-term Melbourne development specialist), developers coming along at the end of a boom are more likely to go bankrupt.
So the message is make sure you do your research – developing isn’t a guaranteed formula – and you may well succeed. I do hope it works out well for you.
Derek
Thanks Derek
You’re right about the surplus cash to pay off future PPOR.
Our accountant provided no future scenario’s – or gave any kind of help like that. Maybe I’m just expecting too much ?
(they do call themselves ‘wealth creators’ in their ad though [V] )With the developing, my partner is a registered builder and also a qualified architectural draftsperson – so can do all that stuff. We had current development built by others, as he is currently working fulltime doing drafting.But we hope to do developing fulltime in future.
We’re NOT expecting to prices to rise much at all in the near future – so will factor that in, as though prices stay stagnant. Any rise will then be a bonus.
We’ve done the number crunching with said friend regarding leaving one unit unoccupied for 6 months – and it does seem the way to go.
(nothing I would have thought of on my own !)There’s an article in this week’s Business Review Weekly on the type of issues the ATO is looking at in relation to property investors. If you leave one vacant, the ATO might regard you as a developer and say all the profit is taxable as income rather than as capital gains.
crj
Inna, why don’t you, develop, draw equity, rent out for CF+, develop new one, draw down equity, rent out for CF+ etc.
This way you have income, and some growth in equity.
Kids are taxed too highly, but you can still give them (I think) $700 ish each year. You can also have a company as a beneficiary, and pay only 30% tax. yes, you’ll pay your marginal rate when you pay it out, but perhaps that company could pay some of your expenses etc.?
I’m also fairly sure that Question 1 is the ‘profit’ between sale price and cost price.
Cheers
Mel
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