Hi everyone,
This is fairly simple (but I always think that, and it tends to prove otherwise …)
I have an IP that I paid $255K for in 2001.
I believe it to be worth around $380K now.
I owe $180K on it.
It's been rented out since original transfer and I've never lived in it, or do I intend to live in it (it's in Victoria, and I'm in NSW).
I've claimed depreciation on it also.I want to purchase a PPOR (I currently pay rent – lots of it).
If I transfer the maximum amount of equity I have in the IP to use as a deposit on the PPOR, when I sell the IP (say in 6 months time) does this minimise the amount of CGT I would then need to pay? (as I've taken my capital gain out of the IP and used it to purchase my PPOR, I'd just be paying off my debt).
I'm thinking of selling the IP to fund my PPOR as I live in Sydney, and need to have the maximum amount of equity, otherwise my repayments are going to be astronimical.
Is there a better way of doing this?
Thanks.
You pay CGT on the sale price of the IP, minus the purchase price.
Any depreciation gets added back onto the gain, and then the tax is worked out at 50% of the gain, at your marginal rate of tax.
So, you paid $255k, it's now worth $380k; you're up for tax on a gain of $125k, plus any depreciation; say it's $10k.
You will pay tax on 50% of $135k at your marginal rate of tax. Say you pay 40% tax; you will pay 40% tax on $62.5k.
$62.5k x 40% = $25k.
Of course; you will need to tlk to your accountant about this situation so that he/she can work out a way to minimise your tax.
If you sell your IP you will have a good deal of cash as a deposit for the new PPoR, but…
Financially, it is better to keep the IP, and keep renting the place in Sydney, unless the deposit on the new PPoR after you sell the IP will give you repayments that are less than the rent you are currently paying.
Problem is, most people want to buy and live in their own place, so there is a strong emotional factor in all this.
Thanks Marc.
So, there's no benefit (tax wise) in transferring equity, or using existing equity as a deposit?
I probably need to spend some time with a loan broker to get my head around this aspect of borrowing (I think I may have oversimplified it).
Strawberry
There is no Tax benefit in using the equity to fund a non tax deductible loan.
Marc has run the figures for you if you sell the property so probably not a consideration.
If you transferred the property to a Trust structure you would incur CGT and stamp duty but would then be able to access 100% of the equity as deposit.
This will cost and you would want to be on the highest marginal Tax rate and wanting to stay in the new place for a while to make it worthwhile.
Richard Taylor | Australia's leading private lender
Got it.
Thanks.
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