Hi everyone.
This is a bit of a long post so here goes.
I was wondering what would be the best strategy going forward with my situation.
I own my own house (debt free) and it as been my PPOR since 1984. I had it valued recently at about 500K and is located about 10-15km from the Perth CDB and was built in the 1960’s. It is situated on an 823m2 block but the current zoning only allows a single title dwelling on it so at the moment it can’t be subdivided or turned into a duplex block.
I currently have about 90K in cash and managed funds and will soon receive about another 125K from an inheritance giving me a total asset base of about 715K. A couple of the managed funds are doing quite well and I also have about 25K in super which is not a SFMF.
The house and land is too large for myself and I want to turn it into an investment property by borrowing against it and getting another place as my PPOR. I want to hang onto it as I believe it will be worth a lot more in the future due to the size of the land. It will however need some repairs and need to be modernised before being rented out. I understand that in this instance any interest payments will be ineligble as a tax deduction. I want to keep my liquid assets to live off rather than use it towards a new PPOR.
I do currently work full time but I’m looking at starting my own small business (just myself) operating from home towards the middle/end of the year. If I operate as a company then earnings will be taxed at 30% regardless and I can protect my personal assets. However, as income will be non-existant to low for a few months as I begin then I would be better off being a sole proprietor and get taxed at the personal rate but I would have no asset protection. Also I may not be able to claim any deductions from the investment property if I don’t pay any personal income tax (< $6000).
I want to be able to do what I want (my own business) and structure things in such a way as to consolidate and build on what I have. I’m 41 years of age, single and have no dependants although that may change so I need to consider that.
Should I borrow against my current PPOR, buy, move into another place as my new PPOR, carry out repairs/improvements and then rent it out? If I convert my current PPOR into an investment property will I still have to pay CGT when I sell? What kind of structures should I look at establishing? Can anyone recommend a good accountant/advisor for what I want to do?
Any advice or suggestions would be apppreciated.
Thank you.
Hi Casper
I think you may have purchased your property before CGT was introduced. I am not sure of the exact date, but beleive it was around 1985.
(Does anyone know?)
If pre CGT, then you could rent your property out and never have to pay CGT. And you could also have another property as your main residence and get the CGT exemption.
Whether this is the case or not may influence which way you could take.Terryw
Discover Home Loans
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Basically it comes down to if or not you believe the combined value of the 500k property and your new ppor will go up in value more than the debt you will have of 8% interest. The answer to this is almost defaintly YES they will!
At the same time you have $200k in funds, does your money actually make more than 8% per year? I doupt it (after tax and everything). The best way here might be to go for a line of credit, they should give you $350k line of credit easily. Buy a new house for say $350k. Put the $200k cash you have on it (unless your 200k cash is making more than 8% PA). So you only in depbt $150k. Rent from the 500k proeprty should cover most of thats interest payment. Then as living expense you just eat into your line of credit, slowly building the debt from $150k until your buisness starts making you an income and you can pay it down.
Yes Terryw,
CGT applies to assets acquired on or after 20 September 1985.
DIY Investing
Discounted Financial Products
http://www.diyinvesting.com.auThanks DIY
In that case, Casper could move out of the existing house and rent it without CGT consequences. He could then buy another house to live in and this could be classed as his main residence.
Using the tax rules to your advantage, he could buy a new place, move in briefly, establish it as his main residence and then move back to the old place. The new residence should be CGT free for up to 6 years.
Casper could also run the business from his home without affecting the CGT exemption on this property.
Casper, with a company, you don’t really get asset protection, but you do get limited liability. So if the company is sued, you are generally safe – but not always.
I think you should always run a business through a company for this reason. And have the shares owned by a discretionary Trust. Don’t worry about tax too much. The company may have to pay 30% on all income, but it could pay you wages so you pay less than the 30%. Wages are an expense to the company, so in the early days it may not have any profit to pay tax on.
Please check all this with an accountant, I am not one.
Terryw
Discover Home Loans
[email protected]
Send an email to get my newsletter.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
What suburb are you in and is it close to train?
Hi Millions,
It’s in the Perth suburb of Dianella. It’s not near the train service but it does have bus services and is close to schools and has three shoppings centres close by – Dianella, Mirrabooka and the Galleria (Morley).
The area around the Mirrabooka shopping centre is going to be revitalised.
I think Dianella is an excellent suburb and worth holding onto. I’ve often thought area is undervalued. I live in Morley so I know area. I know a lot of councils are increasing density of zoning in places within walking distance to trains in next few years. I’m sure eventually all blocks over 800m2 will be sub-dividable. Take a look at renovation of a 1960’s house in Perth at stories in propertydivas website. I wouldn’t recommend my accountant as I’ve only used them for 1 year. Do a search (under “Forums” above) for good accountants in Perth. Good Luck with it. Regards, Linda
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