Hi All,
I’ve been a Buy & Hold investor for quite a while and have acquired quite a few +’ve Cashflow properties. I’m not too keen to sell any but…
I have a remaining mortgage of about $100k on my own home, so I’m paying it with after-tax dollars. (ie. it’s a non deductibale loan)
I’m considering cashing up the substantial capital gain in one of my IP’s to pay out my home loan. I can then use all my nett equity to raise tax-deductible $$ to look for another IP or do a development.
This is all pretty basic stuff but I’m wondering if anyone has any “creative ideas” to get at my cash reserves to get rid of my Home loan and still keep the IP. (I’m not sure there are any tho. ……maybe some refinancing options???)
GC
IMO I wouldn’t worry about paying out your home load with capital gains. Instead, set up a line of credit on your IP and use the capital gains to purchase more CF+ve property. Then use a portion of your cashflow to pay off your PPoR mortgage.
– “Life is what happens when your busy making other plans” –
Sell to your own trust. You would still have similar costs though, except agents fees – and you still get to ‘keep’ the house.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
Click below to email meTerryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Just a point to remember, many mortgage repayments on IP’s include a principle content. This reduces the amount of the loan over time and also reduces the amount of deductible interest.
So why would you want to do that when you have a mortgage on your PPOR that is not deductible?
It’s best to apply all the principle content to your non deductible mortgage and that way it will be paid off considerably faster.
Cheers
JeffHi copper G,
This is how I would look at it.
You are trying to work out if one is better than the other. Here are the sums if:Your house is worth 250k and you owe 100k and…..
Your IP is worth 300k and you owe 150k.
Your net worth is 300k.If you keep it the same you pay
*interest of about $675pm on your home.
*interest of about $1000pm on the IP
*TOTAL INTEREST of $1675pm
You have to earn about $2600 pre tax (at 48.5%) to pay this but you get a tax rebate of $394 on the IP interest.
TOTAL COST = $2600-$394 = $2206pmIf you sell the IP and pay off your home loan. Then use the equity to buy another $300k of investment properties (the same one or other ones, in a trust or in your name…whatever)
…you will have to pay about 25% tax (50% CGT discount)on the capital gain on the IP (say you bought it for $200k)of $25000 + you will have to pay stamp duty of about $15000 plus extra costs of refinancing and setting up trusts and conveyancing etc.You will have reduced your net worth by $40000 and now be worth $260000 and ……..
Your house is worth 250k and you owe ZERO but…..
Your IPs are worth 260k and you owe 250k.
Your net worth is 260k.you pay
*interest of ZERO on your home.
*interest of about $1675pm on the IP
*TOTAL INTEREST of $1675pm
You still have to earn about $2600 pre tax (at 48.5%) to pay this but you get a tax rebate of $804 on the IP interest.
TOTAL COST = $2600-$804 = $1796pmRough estimates in this scenario would mean you are saving $410 pm at a cost of $40,000.
You would BE SAVING MONEY EQUAL TO A 12% RETURN ON YOUR $40000 COSTS. You would have to fund this money by reducing your investment portfolio to $260,000 or injecting $40,000 cash if you kept your existing property.
You of course would really have to do the numbers in your specific instance.If you still want to do it, get your accountant to do exact numbers for you.
And allow for your current tax rate, medicare levy maybe, current cashflow requirements, long term goals, etc.
phew!…. I may have just confused the heck outta ya all….he he he
Live, Learn and GrowLifexperience
Thanks for the responses so far everyone…
– I agree that putting the +’ve CF into paying off the Home mortgage is the way to go. Been doing that but its a bit too slow of a solution now. I want to settle it out, then re-invest.
– Trusts – yes I had a cursory look at these with my accountant but have a significant salary that’s in need of some tax off-setting so I need to keep investments I my own name, …generally speaking.
– LifeX’s response has convinced me (more so) that selling off one of my IP’s is probably the best move I can make to advance forward from here.
I admit I had to re-read it a couple of times but I substituted my numbers and it comes out at an equivalent Net Worth reduction of about $26k with a saving of around $505 pm (assuming my next investment IS about $300k as you used & probably will be, approx) I think my numbers came out so good due to a huge CG I’ve had on the property I’m proposing selling down.This is another angle to look at it from and further validates my decision.
I use Somerset PIA software to evaluate my propoerty decisions, so work things over fairly well (PS.Steve’s new software looks v/interesting too …. Free plugs!!!)Any more bright ideas??? As I said originally I probably want the impossible – ie. Pay out my Home loan but keep my +’ve CF IP too. Life’s a bitch…
GC
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