I currently live in the inner west of melbourne in an old house (house 1) that is still owing ~$200K to which I can redraw ~$90K (extra payments). I’m looking to buy a new family home (house 2) in the eastern suburbs and have ~$130K in the offset account. House 1 in the west was bought in my name and we want to keep it as an investment property. Not sure what it’s worth now but I bought it for around $350K
Sorry for the newbie questions, I’m new to this:
1. Should I buy house 2 under a Trust structure or joint (partner and me)? I’m thinking under our names (50/50) since it will be a family home and Trusts have CGT implications (I think).
2. If I want to keep house 1 as an investment property for a while (15 years), how will the CGT be calculated given it was my family home from 2007-2012? Do you think it’s worthwhile/possible to gift it to a family trust or hybrid trust since I expect to earn more than my partner. I’m guessing there might be stamp duty implications but I’m not sure if it’s worthwhile in the long run.
3. Is it OK to redraw some of the money ($50K-$90K) from the loan back into the offset now prior to buying house 2? This will decrease the amount I need to borrow for house 2 and increase house 1’s repayments. I’m thinking it’s better to refinance and negative gear the investment property.Hi,
I will give my opinion on your questions, I am sure some other people will have different ideas:
1. It is probably better to buy house number 2 in your personal names to keep the CGT exemption. However, if you expect a bigger capital gain over time with the first house, you may want to keep house number 1 as you PPOR for tax purposes (and use the 6 year rule- there is lots of info on that on this website) to keep it exempt from CGT. In this instance it might be better off purchasing house 2 in a trust.
2. You will calculate the CGT apportioning the period of time it was your PPOR. For example, if you kept the house for a further 10 years as an investment property after having it as your PPOR for 5 years, you will pay tax on 50% * 10/15 * the capital gain. The 50% is for the 50% CGT discount you get for holding the property for more than 1 year, and the 10/15 represents it being an investment property for 10 years out of the total 15 years of owning it.
3. This does not work- once you have paid it into your loan, it is stuck in there. If you withdraw the funds and put it into your offset account before using the money to purchase a new PPOR, the interest on that money will not be tax deductioble as the purpose of the borrowings is not for investment purposes. Redraw is counted as new borrowings in the eyes of the ATO.
Cheers,
Lukeluke86 wrote:2. You will calculate the CGT apportioning the period of time it was your PPOR. For example, if you kept the house for a further 10 years as an investment property after having it as your PPOR for 5 years, you will pay tax on 50% * 10/15 * the capital gain. The 50% is for the 50% CGT discount you get for holding the property for more than 1 year, and the 10/15 represents it being an investment property for 10 years out of the total 15 years of owning it.Hi Luke
I think this is incorrect. This would be the case if you moved into an IP but when moving out of your main residence and then changing it to an IP the cost base of the property would be set at the value at the time of moving out generally. see s 118-192 ITAA 1997.
Moving into an IP is covered at s.118-185 ITAA97.
I may be wrong though as I am not an accountant
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
shumai wrote:I currently live in the inner west of melbourne in an old house (house 1) that is still owing ~$200K to which I can redraw ~$90K (extra payments). I'm looking to buy a new family home (house 2) in the eastern suburbs and have ~$130K in the offset account. House 1 in the west was bought in my name and we want to keep it as an investment property. Not sure what it's worth now but I bought it for around $350K Sorry for the newbie questions, I'm new to this: 1. Should I buy house 2 under a Trust structure or joint (partner and me)? I'm thinking under our names (50/50) since it will be a family home and Trusts have CGT implications (I think). 2. If I want to keep house 1 as an investment property for a while (15 years), how will the CGT be calculated given it was my family home from 2007-2012? Do you think it's worthwhile/possible to gift it to a family trust or hybrid trust since I expect to earn more than my partner. I'm guessing there might be stamp duty implications but I'm not sure if it's worthwhile in the long run. 3. Is it OK to redraw some of the money ($50K-$90K) from the loan back into the offset now prior to buying house 2? This will decrease the amount I need to borrow for house 2 and increase house 1's repayments. I'm thinking it's better to refinance and negative gear the investment property.Here are my answers.
1. Heaps of issues here such as:
– Land Tax
– Loss of CGT exemption (but the original place could still get this)
– Tax issues – would ATO see it as a scheme to save tax and deny it?
– little asset protection, especially in the early years.
– stamp duty
– re apply for loans and exiting existing loans2. CGT would be calculated on the value at the time you rent it. So sale price – value at time less costs = CG. Then apply 50% discount and then divide it between owners and add this figure to other income. Should be a max of 25% but much less probably
3. Its ok, but you cannot claim any extra interest incurred. Reborrowing or redrawing = new loan and the interest will only be deductible if the funds borrowed are used for investment purposes.
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:luke86 wrote:2. You will calculate the CGT apportioning the period of time it was your PPOR. For example, if you kept the house for a further 10 years as an investment property after having it as your PPOR for 5 years, you will pay tax on 50% * 10/15 * the capital gain. The 50% is for the 50% CGT discount you get for holding the property for more than 1 year, and the 10/15 represents it being an investment property for 10 years out of the total 15 years of owning it.Hi Luke
I think this is incorrect. This would be the case if you moved into an IP but when moving out of your main residence and then changing it to an IP the cost base of the property would be set at the value at the time of moving out generally. see s 118-192 ITAA 1997.
Moving into an IP is covered at s.118-185 ITAA97.
I may be wrong though as I am not an accountant
You would definitely need to check with an accountant, I agree. I was suggesting that you could move into a trust owned property, but it would have to be done at arms length and not sure what the ATO allows.
Luke,
I would talking about the calculating of the CGT in that post.
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
woops sorry Terry, musn't have read it very well!!
Terryw wrote:Here are my answers.
1. Heaps of issues here such as:
– Land Tax
– Loss of CGT exemption (but the original place could still get this)
– Tax issues – would ATO see it as a scheme to save tax and deny it?
– little asset protection, especially in the early years.
– stamp duty
– re apply for loans and exiting existing loansNeither of us are in particularly risky jobs and since we intent to stay in house 2 for a long time (buying for school zones) it probably makes more sense to avoid the trust.
Terryw wrote:2. CGT would be calculated on the value at the time you rent it. So sale price – value at time less costs = CG. Then apply 50% discount and then divide it between owners and add this figure to other income. Should be a max of 25% but much less probablyDivide by the owners is the problem since house 1 is under my name only.
What about this cunning plan :S
I bought the house 1 prior to marrying and in Victoria it seems to be possible to transfer house 1 to 50/50 ownership without duty. http://www.austlii.edu.au/au/legis/vic/consol_act/da200093/s43.html That way when we sell it down the track we get to divide it by the two owners.
Can I just get a private valuator or does it have to be specific ones? Can these guys also work out what I can depreciate?
Terryw wrote:3. Its ok, but you cannot claim any extra interest incurred. Reborrowing or redrawing = new loan and the interest will only be deductible if the funds borrowed are used for investment purposes.From what you and Luke86 have said it seems that changing house 1 from PPOR to IP and taking out from offset has no impact from a taxation PoV but redrawing does. So the magic is keeping two separate accounts: offset and loan! Geez, if only I knew from the start
Thanks for the help TerryW and Luke86, this is all so new to me so much to learn.
Yes, if you are in VIC there are a lot of things you can do in transferring without stamp duty. In most other states it is more restricted. Your partner may also be able to borrow to buy your share and the money he pays you could be used to pay down the loan on your new home. He would be buying an investment property so the interest should be claimable 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
Terryw wrote:Yes, if you are in VIC there are a lot of things you can do in transferring without stamp duty. In most other states it is more restricted. Your partner may also be able to borrow to buy your share and the money he pays you could be used to pay down the loan on your new home. He would be buying an investment property so the interest should be claimable too.DOH but I’m the bloke in this marriage!
Seems like my cunning plan wasn’t so cunning after all. If I transfer it to both our names 50/50 then the negative gearing will also need to be 50/50 split (I think). We’re planning to start a family so negative gearing for her won’t be very effective for her for a few years. In the long run it should be worthwhile though since we’ll have to sell it one day. Thanks again Terryw.Lee
Seems like my cunning plan wasn’t so cunning after all. If I transfer it to both our names 50/50 then the negative gearing will also need to be 50/50 split (I think). We’re planning to start a family so negative gearing for her won’t be very effective for her for a few years. In the long run it should be worthwhile though since we’ll have to sell it one day. Thanks again Terryw.You must be logged in to reply to this topic. If you don't have an account, you can register here.
