Hi, This is a slightly reworded version of a recent query I had. I'm interested to know what the general consensus is regarding disposal of a previous PPOR which currently qualifies for excemption from capital gains tax (as we moved out less than 6 months ago and it hasn't been officially offered for rent).
Excuse the detail but the situation is
– $130k owed on old PPOR at 5.9% standard variable. Built 1974 double brick Adelaide northern suburbs and market value $300k. Conservative rental return $285pw. Minimal fees to exit the loan if necessary
– $300k owed on new PPOR @ 4.59% 2yr honeymoon rate. Market value $400k
– Other assets include $30k cash currently "parked" in the new PPOR but which is available for redraw (fee free and not included in the $300k owing above) and about $20k shares.Our accountant (who doesn't have any IP's) says to sell the old PPOR and buy something structured better for tax but all I can see is the $8k it will cost to sell the old place and the $15000k+ that it would cost to buy a new IP which mean I may be better off hanging onto the new property and just putting that burnt cash into a third property (which might take some serious talking to convince my wife that it's a good idea.)
I've been mulling over whether to rent out the old place this for the past couple of weeks. Basicly it would be cost neutral if we rent it out through an agent with the current loan and allowances for pretty much everything. The property will need some maintenance in the near future but this has been factored into the neural geared assessment. The property is unlikely to be suitable for cost effective subdivision in the future and is priced at the upper end of the local market.
Alternatively we sell the property, put the $160k equity into the new PPOR, buy another IP in the next year or so and try to structure things a little better. Local agents are telling me that the property will sell within a fortnight for $290-300k if listed at the moment. It's just the cost to reenter the market with another property (stamp duty etc) that seems a killer.
I'm 30years old and we're a 1 income household due to my wife looking after our 2 preschoolers. I'm still within the 30% tax bracket and while we don't really need the cash from a property sale if we sold we'd put some towards some minor updates and reno's at the new place which we could take or leave at the moment.
I just don't know what to do and would like to know how others with more experience would approach the situation ie what questions should I be asking myself that I haven't yet. This is clogging my brain and is all I can think of at the moment.
I would hang onto it – if it is going to be neutral. Is the loan currently Interest Only?
Also don't forget to factor in depreciation costs – it is around $600 to get a schedule done. Our Investment Property that was our PPOR is post world war 2 and we are claiming around $1500 per annum depreciation.If you're a 30ish single income family in the 30% tax bracket I'd be less worried about tax and more about profit.
Have you asked your accountant what advantages there are to buying a different property 'structured better for tax'?
I'm far from a tax expert, but if the plan is to get positive income in your wifes name (either buying property in her name or through a discretionary trust), then you need to make more than the $23k worth of tax savings to make up for the selling/buying costs you mention. Thats around $70k worth of profit (not income, profit) at your 30% rate you're paying now. Except I assume its already in both your names so its only the 50% of the profit in your name currently taxed at 30%, so more like $140k profit.
On the other hand if he's talking about buying negatively geared property, then of course you only make 30% of your losses back from the tax man, so now you're losing money and only getting marginal help from the tax office. So your single income family now has less money week to week to live on.
I dunno, maybe the experts on here or your accountant cant pick up where I'm going wrong, but I don't see much advantage in selling.
A different option might be to borrow against all that equity in the old PPoR to buy a second IP. Even if you cant find a positive or neutrally geared property on its own, the profits from renting your old PPoR could be used to offset any loss in the new one giving you 2 IPs that cover themselves as a pairing that will move positive as rents increase overtime, and giving you twice the capital growth whenever that happens.
Meh, like I say no expert, just rambling ideas.
i wonder why you have not rented it for nearly 6 months?
have you had financial advice re your situation, not just in regards to tax?
for example holding property as an investment may have impact on centerlink as well. you mentioned you have 2 small children.
i would not sell at the moment. i would rent it and direct the income towards your current PPOR to reduce that debt.i would review the situation in a couple of years but monitor the cashflow closely.
the yields from houses in the northen suburbs are not too bad but the capital gains are a bit slower than some areas.buying/selling does chew up a lot of money. you do have a lot of debt however, at present. is your job secure? can you manage the debt and sleep at night?
i am not privvy to your personal situation so this is just a personal opinion.
what were your plans prior to purchasing the 2nd property as a PPOR?what did you intend to do with the 1st PPOR, and when did you purchase it?
good luck. just a few other things get it professionally managed and have landlord insurance. if you chose to keep it as an investment.
Thanks bjaust and maree_bradross
In answer to your questions
– The loan on the IP is currently interest only
– the IP is currently held in both of our names
– I'm skirting the 40% tax bracket and a vehicle salary sacrifice is the only thing keeping me from going up to the next bracket.
– I'm assuming that the accountant seems to think that a newer property may appreciate in capital value faster than our old one and obviously would have the added benefit of being able to depreciate the building cost as well. Fixtures and fittings I know we can depreciate but the property is too old to depreciate the building itself.Anyone else have any thoughts on the options or questions I should be asking?
Hi pully
Thanks for your comments. The property has been "looked after" by my brother for the past 4 months whilst we worked out what to do with it. You're spot on re Centrelink and I have spoken with them and been advised that as long as the property is neutrally greared then there shouldn't be any issue as there will be minimal income after expenses.
I'd consider my job pretty secure (Local Government) and worst case I should be able to pick up another position pretty easily in the event of something unfortunate (touch wood).
Initially we bought the first property with the intention that it would become a rental when we upgraded down the track (we actually rented the property for 12 months before we bought it about 5 years ago). Since then we've been to a few seminars re property and can see some of the advantages with negative gearing.
I can sleep with the knowledge of the debt and we should be able to accommodate an interest rate rise of about 2% without needing to cut expenses. If the property is rented then that is pretty much out of the picture expenses wise as it should look after itself. The $300k on the new place is the tricky bit but within our means at present.
I think I'd go back to the accountant and ask him for figures to show why selling and buying a better tax placed property would be of benefit.
Some points to consider:
By thinking about what to do for 4 months you have missed out on $5000 in rent!
If you sold and put $130,000 into your home loan you may save around $6,500 in non-deductible interest per year.
If you kept it you would get any future capital growth – now may not be a good time.
If you had the loan IO with a 100% offset account you may still have a high loan on it and it could have saved you more tax.
Looks like you have the not ideally set up either. What if you move out of this one after paying the loan down – you would have a similar problem. Far better to maintain a high loan with money in the offset.
I would probably be inclined to keep it for now. Talk to your accountant about setting it up a bit better. Eg. you could set up a LOC and use that for all expenses freeing cash to pay down your own home loan ( would be better off going into a 100% offset account!)
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
Some points to consider:
By thinking about what to do for 4 months you have missed out on $5000 in rent!
If you sold and put $130,000 into your home loan you may save around $6,500 in non-deductible interest per year.
If you kept it you would get any future capital growth – now may not be a good time.
If you had the loan IO with a 100% offset account you may still have a high loan on it and it could have saved you more tax.
Looks like you have the not ideally set up either. What if you move out of this one after paying the loan down – you would have a similar problem. Far better to maintain a high loan with money in the offset.
I would probably be inclined to keep it for now. Talk to your accountant about setting it up a bit better. Eg. you could set up a LOC and use that for all expenses freeing cash to pay down your own home loan ( would be better off going into a 100% offset account!)
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
Terryw wrote:Some points to consider:
By thinking about what to do for 4 months you have missed out on $5000 in rent!
If you sold and put $130,000 into your home loan you may save around $6,500 in non-deductible interest per year.
If you kept it you would get any future capital growth – now may not be a good time.
If you had the loan IO with a 100% offset account you may still have a high loan on it and it could have saved you more tax.
Looks like you have the not ideally set up either. What if you move out of this one after paying the loan down – you would have a similar problem. Far better to maintain a high loan with money in the offset.
I would probably be inclined to keep it for now. Talk to your accountant about setting it up a bit better. Eg. you could set up a LOC and use that for all expenses freeing cash to pay down your own home loan ( would be better off going into a 100% offset account!)
Hi Terry
Thanks for your input, I enjoy reading your other posts and value your input.The loan on the IP has 100% offset facility included but it not being used at present as all of the available cash was withdrawn to put into the new PPOR. The IP loan has worked very well for a PPOR over the past 5 years and has minimal costs to get out of if need be (about $400 total all fees included).
The plan is to stay in the new PPOR for 10-15 years minimum. There's no offset facility on the PPOR loan but there is free redraw so any extra cash we have is 'parked' in the loan effectively working the same way as an offset account.
The LOC idea has me intrigued. Is it possible to set up a LOC on the IP and then withdraw funds to put into the PPOR and still claim an interest deduction on the IP loan. I thought that you could only claim a deduction on funds used for investment purposes. Could you please clarify? Does the use of the LOC lead to issues down the track in relation to increasing the baseline value (I know this isn't the right term but hopefully you know what I mean) of the IP if we sold it?
Thanks
Sam
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