Hi – any help with my post below would be very much appreciated; Myself and my husband are planning to move out of our PPR (purchased Oct 09 for $503k, recent valuation approx $560k value, current mortgage $360k) and make it an IP – renting out for approx $575 p/w.
We will be moving into rented accommodation ourselves of around $450 p/w. Reason for this is to assist cash flow next year as I am taking maternity leave for whole of 2011 and will be losing 9 months of my salary. My husband is self employed and whilst income is at a good level, income is received irregular lump sum payments rather than a monthly wage.
I'm interested in any insights into;- Any tax implications of moving the PPR to an IP
- Whether we keep the mortgage at P&I or Interest only
- Whether we keep our current offset account (c.$100k in there offsetting the o/s $360k mortgage currently) or use that money for other means i.e purchase of another IP.
Our plan had been to pay off the mortgage asap when we were living in it then use the equity to start a property portfolio however now our plans have changed and we are not going to be living in the property, should we be busting a gut to pay this mortgage off? Any thoughts, gratefully received!
Any costs that are related to investment or business will be tax deductible – please talk to your accountant however as advise on tax is not my thing.
I am one for I/O loans if planning to build a portfolio and my argument is ‘why pay off the principle now when any extra funds can be put to increasing the size of your asset’ later on down the line you will most likely sell a property and pay out your portfolio debt entirely. I am also one for building wealth and if I had extra funds lying around I would be out there shopping around.
Looking at your position I would propose accessing equity from your existing property to fund the deposit and costs of a purchase so nothing out of pocket so to speak.
In my opinion If you ‘bust your gut’ to pay the mortgage off now you will never build wealth .. many experts suggest to use that money to increase your assets as Its the overall size of the asset that gives you the return on the investment. The bigger the portfolio the greater the compounding growth effect’.
Feel free to shoot me an email if you would like to discuss further, happy to help.
Hi Brisul
Firstly welcome to the forum and I hope you enjoy your time with us.
To answer a couple of your questions:
1) The rent received on the property will need to be declared as income however the expenses incurred as a result of this will be deductible. I am assuming that the property is held as Joint Tenants so the income / deductions will be apportioned 50 / 50.
Any costs incurred in setting up the original loan will also be deductible over the balance of 5 years or the term of the loan whichever is the longer commencing from the date of original Settlement. (Might mean you can claim just under 4 years worth)
From the initial figures the property will likely to be slightly positively geared so this will be disadvantage to your husband.
I am unsure as to the age of the property however a Quantity Surveyors report may be worth looking at in order to claim an Capital Allowances / Depreciation.
2) I would be switching the loan to interest only (In some cases we recommend this to clients even for a PPOR just in case something like this happens) with 100% offset account however be careful as there are some quazi offset accounts on interest only loans with certain major lenders. These should be avoided.
3) Going forward with a new IP purchase I would not use the offset savings however look to release equity and use this as a deposit for a new IP (Assuming you can service the loan with your pending maternity). Structuring the loan you would need to look at splitting the loan between your current PPOR (future IP 1) and new IP to avoid cross collateralising the 2 securities.
Of course we haven't discussed a spousal buy out in relation to the remaining shares in the existing PPOR to maximise your deductions when the property is rented. In certain States there is no Stamp Duty and could be worth looking.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks Tony / Richard – really appreciate your comments. As you can tell, we are relatively new to the property game but very keen to learn and build a portfolio.
To clarify, yes the property is jointly owned and we are in NSW – not sure whether that means you have to pay stamp duty on spousal buyout? Seems like if nothing else, we will switch our mortgage to IO – so thanks for that.
Richard if you could clarify why we should keep the 100% offset account when we switch to the IO mortgage – as would this not reduce the amount we can claim at tax time as the interest has been reduced.
As a little background, my husband has only got 1 year s/e accounts (now halfway through 2nd year) so our mortgage is based on my income only. We were in the process of buying our first IP a couple of months back (as keen to get this before I went on maternity) but it unfortunately fell through and we haven’t found anything in it’s place.
Subsequently, when I leave work in January, we will have limited serviceability and will unlikely to able to get an IP until June 2011 (when we’ll have 2 years accounts for the business). So our “plan B” was to rent out our PPR, but given now that it will be slightly positively geared, I’m now not sure if this is going to help much from a tax perspective. I think we need a ‘’plan C’’
The other reason for moving into rented is my husband works from home, so could then claim a portion of the rent back (which we’re not currently doing on PPR as advised his would affect capital gains down the line) so we have to take that into consideration too. As you can tell, we’re so keen to get things moving in the right direction as first baby is due in 10 weeks and to effectively utilise the equity and savings that we do have to – but we don’t have the knowledge to know what to do for the best. Our current accountant has been very disappointing and seems quite against property as an investment – so we need to change –
Does anyone recommend or know of anyone in Sydney that offers a mix of advice on business, tax and property all in one?
Thanks again for any helpful ideas/thoughts
Hi Bris
Interest only gives you flexibility as you never know you may decide to buy another PPOR down the track (where of course the interest will not be Tax deductible) and want to use the funds in the offset account as the deposit.
if you have paid off the loan then you will have issues in trying to split the deductible interest / non deductible part.
Does it matter than the amount you loose is less than it would be….. Dont buy property purely for the Tax benefits.
There are several excellent style loans that could cater for your husband self employment depending on the loan to valuation ratio.
Certainly renting a property and claiming a portion of the rent / power etc as a deduction to your husbands business makes sense and wont contaminate the PPOR for CGT purposes as long as you move back into the property within 6 years and have claimed another property as your PPOR.
I would be accessing some equity in your current property initially and then using this as deposit on the new IP whenever this maybe. I am unsure as to with whom your current loan is with as this will have a bearing on the product range and interest only flexibility.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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