Hi all. I am a full time housewife who managed to buy a + cash flow property entirely in my name using the equity in my PPOR and my husband as Guarantor. That was in 2009. I would like to sell the property next year as it has increased in value by roughly 200k and i have losses of roughly 30k from other properties my husband and i purchased together. Problem is, i'm either gonna have to fork out big time on realestate agent fees, then CGT, or the other thought i had was to set up a family trust and sell it to the trust at the current market value, as the rent alone will still cover the morgage, we would still own a property that could continue to make us good money in the future, and the stamp duty would be similar, maybe more than real estate agent fees. I would still have to pay CGT though and either way i think id lose about 50K through the process. Someone suggested selling half to my husband??? Has anyone got any ideas on how to maximize the profit and minimize the loss?
Cheers.Not many ways to avoid CGT.
At least you are on a low income, so the effect will be less. If you have a $200,000 gain then take off buying and selling costs, say $40,000 and then apply the 50% CGT discount = a taxable gain of $80,000 this would be added to your other income.
Selling to a trust won't assit with this, CGT will still apply at market rates, stamp duty as well.
Any loss by the trust will be trapped in the trust, land tax may also be payable depending on the state you are in.
It may still be a good idea though as it will release equtiy which you can use to pay down non deductible debt. But get advice first to make sure it passes ATO scrutiny.
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:Not many ways to avoid CGT.At least you are on a low income, so the effect will be less. If you have a $200,000 gain then take off buying and selling costs, say $40,000 and then apply the 50% CGT discount = a taxable gain of $80,000 this would be added to your other income.
Selling to a trust won't assit with this, CGT will still apply at market rates, stamp duty as well.
Any loss by the trust will be trapped in the trust, land tax may also be payable depending on the state you are in.
It may still be a good idea though as it will release equtiy which you can use to pay down non deductible debt. But get advice first to make sure it passes ATO scrutiny.
Thanks for your time and reply.
When you say any loss by the trust will be trapped in the trust, is that good or bad? I'm assuming that it would be bad for my hubby as it then can not reduce his taxable income? But would it be good or bad for me having zero income?If you don't sell, you won't pay cgt. For example, you could enjoy the increase in value of your property by using the equity as a deposit to buy an additional property. This can be done by means of taking out a second mortgage against the property.
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paulandjo wrote:Terryw wrote:Not many ways to avoid CGT.At least you are on a low income, so the effect will be less. If you have a $200,000 gain then take off buying and selling costs, say $40,000 and then apply the 50% CGT discount = a taxable gain of $80,000 this would be added to your other income.
Selling to a trust won't assit with this, CGT will still apply at market rates, stamp duty as well.
Any loss by the trust will be trapped in the trust, land tax may also be payable depending on the state you are in.
It may still be a good idea though as it will release equtiy which you can use to pay down non deductible debt. But get advice first to make sure it passes ATO scrutiny.
Thanks for your time and reply.
When you say any loss by the trust will be trapped in the trust, is that good or bad? I'm assuming that it would be bad for my hubby as it then can not reduce his taxable income? But would it be good or bad for me having zero income?Well, your husband couldn't use a loss to offset his personal income if the loss is in the trust. But it would carry forward to offset future incomes.
Having zero income could be good and bad! Good in that you pay now tax, but bad it that you have wasted the tax free threshold – you could have earnt up to $16,000 pa and pay no tax.
Terryw | 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
Well done on buying a positive cashflow property! Not easy to do.
I assume your other properties are negatively geared?
If so, I think you are saying you plan to sell your fantastically performing property, to fund your losses from the poorly performing properties.
WHY WOULD YOU DO THAT!(Sorry for shouting!)
Wouldn't logic dictate you'd be better to get rid of one or some of the underperformers?
And keep your best property?
That's what I'd do, at least if you realise a loss you won't pay tax, and you'll keep your great property which should continue to appreciate as well as giving you cashflow!
Or you can keep the poor performers in the hope they may go up one day…. and have your borrowing $$ tied up in property that is not helping you realies your goals.
If there is a reason to sell the CF+ property I'm not seeing, another thought is re-finance and take some equity out of your good property, to help you with the losses. (As Terry suggested.)If you do sell your positive cashflow and reap your profit, see Terry's numbers.
If it is your only income, you will be taxed as though you earned $80,000, ie you may pay $20,000 to $30,000 tax.
(Check with an accountant, I'm guessing.)It is better for that to be in your name, as your husband will be on a higher tax bracket ie will pay more tax.
If you bought it in a family trust, you can choose who the beneficiaries will be, ie any charity listed as a beneficiary on your family trust will be given tax-free dollars, and you can choose which percentage goes to who according to their tax brackets.
But once you have bought it in your name, paying stamp duty to transfer the title is going to negate any benefit.If you dont sell, you will never pay CGT or selling fees.
I assume you are after the trapped equity in the property to do other deals.
Think of the following 2 examples dealing with the same property, purchased for AU$250K now valued at AU$400K with AU$150K in equity (assuming interest only payments).
1. Selling:
AU$400K less selling costs with a REA ~AU$10K = AU$390K less the mortgage of AU$250 = AU$140 'profit' taxed on 50% at your 'actual' tax rate (assume 30%) = AU$140K/2 = $70K less 30% tax (AU$21K). Total costs = AU$10K REA selling fees + AU$21K in tax = AU$31K from your origional captial gain of AU$150K leaving you with AU$119K; thats 79.33% after costs.
Now when you get another loan you will also incure additional lening costs and have to jump thru the banks lending criteria again with ~AU$600 to AU$1,000 in fees.
2. Retain the property and borrow up to 80% (min) of the current value of the property.
Using the same starting figures you could borrow 80% of the current value (AU$400K without paying for Lender Mortgage Insurance- LMI) = AU$400K x 80% = AU$320K less the origional loan of AU$250K = additional accessable equity of AU$70K.
The AU$70K will allow you to use this as a 20% deposit on an investment property with a purchase price of AU$350K.Unless this property is an underperformer I would hold onto the origional property and use BOTH properties to gain wealth.
ie: assuming a steady 7% capital gain on BOTH properties, they will perform like so in the next 12/24/36 months.
$428K/$$375K in 12 months, then $458K/$400K in 24 months and $$490/$$429K in 36 months. This gives you a additional combined equity of $$53K then $108K then $169K.
Assuming an average property price of ($400K plus $350K = $375K) plus standard property price increases of 7% pa = $400K at the end of the first year, then $430K then $460K.
Assuming that you can again release the increased trapped equity, you could afford to purchase a 3rd property sometime between 24 and 36 months. ie: At the end of the 24 months you have 2 properties worth $858K x 80% = $687K less the origional 2 loans of $250K and $280K (pruchase price of $350K less 20% deposit of $70K which you borrowed against your first investment property by release the trapped equity) [$$530K] = $157K available to release again etc etc.Unless the property is underperforming, by selling, paying costs and paying taxes you are reducing your ability to leverage the increased equity in your investment property.
You want the equity to be released.
I suggest that the investment properties be placed in a family trust; that way you can distribute the 'income' to members of your family by splitting its income using the first $6K tax free amount for EACH tax payer. But remember, the trust may never make a tax profit unless and until you eventually sell (either to pay down your loans or to gain access to your 'property retirement fund'. If its not sold, there is no capital gains tax: you are delaying the tax for some future distant date. You can make much better use of your funds than the tax man can.
Have all of your properties revalued at least every 12 months (6-9 months if a particular property takes off) and use the increased equity ASAP.Colin
An adult can acutally earn up to $16,000 pa tax free when the low income tax rebate is taken into account. This will raise to about $20k next year (or the year after?). This makes using a discretionary trust very attractive now.
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
paulandjo wrote:Hi all. I am a full time housewife who managed to buy a + cash flow property entirely in my name using the equity in my PPOR and my husband as Guarantor. That was in 2009. I would like to sell the property next year as it has increased in value by roughly 200k and i have losses of roughly 30k from other properties my husband and i purchased together. Problem is, i'm either gonna have to fork out big time on realestate agent fees, then CGT, or the other thought i had was to set up a family trust and sell it to the trust at the current market value, as the rent alone will still cover the morgage, we would still own a property that could continue to make us good money in the future, and the stamp duty would be similar, maybe more than real estate agent fees. I would still have to pay CGT though and either way i think id lose about 50K through the process. Someone suggested selling half to my husband??? Has anyone got any ideas on how to maximize the profit and minimize the loss?
Cheers.Another idea.
If you want to sell to release the equity and restructure etc then you could think about selling half the property to a discretionary trust in one financial year and half in the next. This would be a bit of mucking around and may result in 2 lots of conveyancing fees, but could save you CGT.
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
quickchick wrote:Well done on buying a positive cashflow property! Not easy to do.I assume your other properties are negatively geared?
If so, I think you are saying you plan to sell your fantastically performing property, to fund your losses from the poorly performing properties.
WHY WOULD YOU DO THAT!(Sorry for shouting!)
Wouldn't logic dictate you'd be better to get rid of one or some of the underperformers?
And keep your best property?
That's what I'd do, at least if you realise a loss you won't pay tax, and you'll keep your great property which should continue to appreciate as well as giving you cashflow!
Or you can keep the poor performers in the hope they may go up one day…. and have your borrowing $$ tied up in property that is not helping you realies your goals.
If there is a reason to sell the CF+ property I'm not seeing, another thought is re-finance and take some equity out of your good property, to help you with the losses. (As Terry suggested.)If you do sell your positive cashflow and reap your profit, see Terry's numbers.
If it is your only income, you will be taxed as though you earned $80,000, ie you may pay $20,000 to $30,000 tax.
(Check with an accountant, I'm guessing.)It is better for that to be in your name, as your husband will be on a higher tax bracket ie will pay more tax.
If you bought it in a family trust, you can choose who the beneficiaries will be, ie any charity listed as a beneficiary on your family trust will be given tax-free dollars, and you can choose which percentage goes to who according to their tax brackets.
But once you have bought it in your name, paying stamp duty to transfer the title is going to negate any benefit.Hi there! Okay some more info is required especially in regard to 'why?'
Firstly, the property has a 700k morgage on it, hence a recent rate rise caused the repayments to jump nearly $1000 per month and yes it still does produce a good +CF after that but my losses are now higher and I already have 30K of losses from previous years that i need to use at some point.
Secondly I have 2 other properties in both my and my hubbys name, one that is also a good +CF, the other neg geared and between the 2 they balance my income to 0 so as not to effect my Family payments. (I have 2 young kiddies).
That is why I though by selling this one to a trust, I still have the property working for me, the rent will cover the repayments, upkeep, PM fees and costs ass with the trust and prob balance pretty close to neutral. Income (if any) can be distributed where we need it, and the profit i get out of it would eliminate my morgage on my PPOR entirely and some therefore eliminating a non tax deductable debt.
So maybe that will help with the why, but losing 50k in the process, am I really losing or when you bring into play that we won't be forking out 1000 bucks per month on our own home loan is it really a loss???
Also does anyone know, can you lease a property to a trust? And have the trust control the income that comes in? Another possible way to distribute funds??
Thanks everyone for the posts too…..
I think you will have to do the sums. It may cost you XX now, but it will save you ZZ per year in tax sort of thing. You then have to decide is it worth doing.
You could possibly lease the property to a trust and then allow the trust to on lease it at higher rates. But you would have to do everything at arms length for tax reasons.
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:I think you will have to do the sums. It may cost you XX now, but it will save you ZZ per year in tax sort of thing. You then have to decide is it worth doing.You could possibly lease the property to a trust and then allow the trust to on lease it at higher rates. But you would have to do everything at arms length for tax reasons.
The idea of selling half to the trust 1 yr and the other half the next, i think that might be worth looking at too….stamp duty would be the same but you think it could reduce the tax on the income substantially?
It may reduce the tax – you would have to do the figures. It would also help you manage the CGT as there are other ways to reduce your overall taxable income such as prepaying interest, contributing to super etc
Terryw | 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
Keep the +CF properties and sell the negative CF property. Thats makes far more sense than selling you better performing properties.
As or your own home, have you considered moving out and leasing your PPOR and leasing/renting a similar style property for less money? You will find that renting a property of the same standard is usually cheaper and you can pay for it from the increased income from renting your current home PLUS you may be able to release the trapped equity in that property as well to generate additional properties.
Do not be fussed about negative gearing, you should be looking to pay as much tax as possible….as this means that you are earning HEAPS of money = cash IN after all expenses. In addition, the banks LOVE +CF properties AND will allow you to borrow more = buy more +CF properties and make more cash IN = more tax = better investments.
When you do your cals, base them on figures that do NOT include tax deductions as this will give you a truer +CF v -CF comparison. You MUST assume that the property can provide +CF if/should you stop work (due to loss of a job or a desire to stop work). If you base your figures on tax deductions, it assums that you will have additional employee (plus other income) against which to deduct that figure. If you stop work then is nothing to deduct the tax deductions…even thu you can carry them forward for a number of years (7 I think).
So, to recap:
1. Sell the negatively geared (non performing) property.
1a. Pay down the other mortgages if you see fit to increase the +CF effects of the better properties.
2. Move out of your current home into a similar property and pay less (in rent v mortgage) per month.
3. Rent out your current home to gain additional rental income and gives you the ability to claim that properties tax write-offs whci are currently not allowable).
4. Borrow against the trapped equity in your current home to purchase additional POSITIVELY geared property.
5. Place the NEW purchases in a trust.
6. Do NOT transfer the +CF geared properties into a trust so you save the transfer fees which can be better used elsewhere.
7. Buy ALL future properties with a trust so you retain the ability to borrow with the banks, who will usually require a personal guarantee. (NOTE: the banks view a guarantee as an UNREALISED debt, as such, it does not [yet] form a part of any [current] obligation to a debt (mortgage).colinnewland wrote:Keep the +CF properties and sell the negative CF property. Thats makes far more sense than selling you better performing properties.
As or your own home, have you considered moving out and leasing your PPOR and leasing/renting a similar style property for less money? You will find that renting a property of the same standard is usually cheaper and you can pay for it from the increased income from renting your current home PLUS you may be able to release the trapped equity in that property as well to generate additional properties.
Do not be fussed about negative gearing, you should be looking to pay as much tax as possible….as this means that you are earning HEAPS of money = cash IN after all expenses. In addition, the banks LOVE +CF properties AND will allow you to borrow more = buy more +CF properties and make more cash IN = more tax = better investments.
When you do your cals, base them on figures that do NOT include tax deductions as this will give you a truer +CF v -CF comparison. You MUST assume that the property can provide +CF if/should you stop work (due to loss of a job or a desire to stop work). If you base your figures on tax deductions, it assums that you will have additional employee (plus other income) against which to deduct that figure. If you stop work then is nothing to deduct the tax deductions…even thu you can carry them forward for a number of years (7 I think).
So, to recap:
1. Sell the negatively geared (non performing) property.
1a. Pay down the other mortgages if you see fit to increase the +CF effects of the better properties.
2. Move out of your current home into a similar property and pay less (in rent v mortgage) per month.
3. Rent out your current home to gain additional rental income and gives you the ability to claim that properties tax write-offs whci are currently not allowable).
4. Borrow against the trapped equity in your current home to purchase additional POSITIVELY geared property.
5. Place the NEW purchases in a trust.
6. Do NOT transfer the +CF geared properties into a trust so you save the transfer fees which can be better used elsewhere.
7. Buy ALL future properties with a trust so you retain the ability to borrow with the banks, who will usually require a personal guarantee. (NOTE: the banks view a guarantee as an UNREALISED debt, as such, it does not [yet] form a part of any [current] obligation to a debt (mortgage).Have def considered moving out of our ppor and renting. My hubby is also in the process of starting to do some contract work from home so we'd have to set him up as a sole trader abn etc, so would this enable us to then claim some of the rent we'd be paying as a tax deduction? Can't sell the neg geared property. Stuffed up big time with that when we fixed the morgage for 5 yrs and we'd lose too much money if we sold it now. 2 yrs from now we could.
It could be a good idea to rent as you can rent out your home and still keep it exempt from CGT for up to 6 years. If your husband runs a business from home then you would claim part of the rent too.
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
You coulkd claim some of the rent as a business expense (home office space, based on floor area plus storage costs of tools etc = garage) plus a % of power, water, gas, rent.
The Govt has just passed a new law in regard to exit fees (meaning NO exit fees are now allowable)
I would also compare the costs of holding (continuing to pay morecosts than it earns over the next 2 years v's any (possible) exit fees on the current mortgage.
You can ALWAYS ask to renegociate a loan (with your current lender or a new lender. The price may go DOWN, making this more +CF.
You could also seek to add value on the property and therefore increase the rent, again making this more +CF.I would also suspect that the interest 'lost' on this fixed loan is far less than the cost of paying transfer taxes just to move it into a trust.
You could also offer the property (at an increased price) to a 'buyer' on a 'Rent to Own' deal to a person that is unable to get a bank loan (but DOES have the capacity to pay rent (mortgage) for at least 12 months (so they can then prove to the bank that they have the capacity to pay and therefore qualifying for a loan.
You set a price ABOVE the current market (based on at least CPI increases every 3 months. ie: Current price = $400K; in 3 months its $408K ($400 plus 2% [using an 8% pa increase in value divided by 3/12 months]; then at 6 months is $416,160 etc etc.].
They can do this via a set price/set date contract or have the OPTION to purchase the property [at the stated increasing price] with the agreed time frame. They will have a desire to properly maintain the property and to add value as they know that is will be their property in a short space of time.Whoa, my first effort at quoting and it didn't go as planned!
Sorry.PaulandJo, I think you need to be sure on what your main priority is for having investment properties.
We would all say, wealth creation, but from what you have said, maybe tax minimisation and retaining your family benefts are higher priorities? Tax minimisation is fine, but should not be the reason for buying or selling.
In my opinion, the problem with some accountants is they are all about tax minimisation but not too helpful with wealth creation.If you make a loss on the negaitively geared loan, (increased by getting out of your fixed loan), your +CF will be free to finance more +CF property, eg deposit or stamp duty. And you may be able to carry the loss forward against future taxable income.
Your +CF property you want to sell, you state your CF is still positive but now your losses are higher…..
ie your negatively geared property is more negatively geared?
More reason to get rid of it, I would say!!I agree broadly with Colin, except perhaps that moving out of your PPOR is a personal decision and you have to be sure that you can find somewhere you'd be happy to live at a price you'd be happy with. (Is there a very low vacancy rate? If so, great for you to be the landlord but hard for you to be a tenant.) And with little kids, you're at the mercy of a landlord who may put your home on the market as soon as you move in.
I see no benefit from selling your +CF into a trust. Income from trust (there must be some by definition, if it is more than maybe $1500 trust expenses per annum, plus ? land tax) will still be taxable for whoever is the nominated beneficiaries, eg you and hubby. But great to buy future +CF property in a trust. And terrible structure to buy property that doesn't end up being +CF after expenses!
If at all possible, your loans should be structured so that your PPOR has all the equity, and the investments, no equity (as interest is tax deductable on them). Depending on your total equity, this may mean cross-colateralising your PPOR and IP's, which also has its down side. Your choice.
Accountants are about recording the past and not about planning the future. Nor are they usually property investors themselves.
NEVER EVER cross-colateralise any of your loans. That is an 'all in' loan. If for some reason one property needs to be sold or HAS to be sold, the banks can sell off any or all of your other properties as well as access your bank accounts. They can also freeze your credit cards if they are linked to the savings and/or investment property accounts.
Make sure each investment property stands alone, this is a MUST.All I can say is thank you so much for all the advice and I will def look at all options!! So many!!! I think that selling the neg geared property and making a loss wouldn't be so bad after all too. At the end of the day though i have no problem paying lots of tax, cause as said by someone earlier, "if you're paying lots of tax it's because you're earning lots of money". Ultimately wealth creation is our priority, for us and our kids.Thanks everyone!
Jo.
Ps…..continue with the advice if ya think of any more…
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