I was in a casual conversation with some friends about the best investment strategy for their situation.
They are in the enviable position of owning their own home, but there is the potential for a long term overseas job opportunity that would take them out of the country as soon as next year.
They were considering simply renting the family home but after conversations are now considering buying one or more investment properties. They are still unsure what to do with the family home, now that the home is paid off, and it is not tax deductible.
They are considering selling the PPOR (for around 500,000) paying $50,000 cash for a deposit on a $500,000 IP and keeping the rest of the money in an offset account. If this reduces the interest to almost zero, is there any point to this strategy? They will eventually have a fully paid investment property and $450,000 cash, but if they keep all that cash in offset, does that mean it is positively geared? Just wondering whether they are better just hanging onto the +ve geared family home which may appreciate further and which they won't pay CGT on?
Second, is keeping the family home (and still investing) a viable option? Is the equity release tax deductible? I've noticed a few posts reference releasing equity and taking out more than one loan — one for the deposit and one for the balance. Does this mean 100% of the IP is financed? As I understand it, they would not be able to access all the equity, only around 80%, so would have to look at properties around 400,000.
So with this in mind, which strategy is better:
1. sell the PPOR & pay cash for the deposit on 500K IP with 450K loan 450K in offset
2. sell the PPOR & pay cash for the deposits on two IPs (and borrow more funds)
3. release the equity, and buy a 400K property
…any other options?
Cheers
Thanks for the comprehensive reply Derek; it took me a while to read it all!
O.K. I was always of the opinion a line of credit was a dangerous thing! I never really saw it as a tool before. So I guess in your example it would be important that they only use the "line of credit" as a loan (not a true revolving credit facility) in order to keep it untainted and the interest deductible?
Just out of interest, to keep the funds untainted, can two (or more) separate lines of credit (to pay the costs on multiple IPs) be secured against the one PPOR?
Cheers
Hi Dgirl,
LOCs are a great tool if used correctly and with discipline. I have seen people squander their LOC – this is certainly something to be avoided at all costs. The greatest tainting of LOCs occurs with people mixing non-deductible debt (car, holiday etc) up with their investment debt.
I like to keep things simple – I use an offset account linked to my own home to assist with the home loan and have a LOC for my investment properties.
MY LOCs and IP loans are all interest only. I do not use a revolving line of credit facility as per those companies who advertise "pay your home loan off in 10 years with our secret" – as I said in my previous paragragh I like to keep things simple.
You can create multiple LOCs secured by one PPOR.
Hope this helps.
dgirl wrote:They were considering simply renting the family home but after conversations are now considering buying one or more investment properties. They are still unsure what to do with the family home, now that the home is paid off, and it is not tax deductible.Tax deductibility should never be the primary reason for investing. They can do both, continue to own their own home and buy additional investment properties.
dgirl wrote:They are considering selling the PPOR (for around 500,000) paying $50,000 cash for a deposit on a $500,000 IP and keeping the rest of the money in an offset account. If this reduces the interest to almost zero, is there any point as there is nothing to negative gear against… would they be better buying a couple of properties?This is a pointless exercise – in fact they go backwards due to buying and selling costs and the lost of CGT free status for 6 years on their existing property.
Their net wealth position does not change. They still own an asset worth $500K and their tax position (exc CGT above) largely remains the same.
dgirl wrote:Second, is keeping the family home a viable option? I've noticed a few posts reference releasing equity and taking out more than one loan — one for the deposit and one for the balance. Does this mean 100% of the IP is financed? As I understand it, they would not be able to access all the equity, only around 80%, so would have to look at properties around 400,000.This certainly is a viable option as they avoid loss of $ for buying and selling costs. Sure their taxable income increases and may expose them to increased income tax. But even on the highest marginal rate they will still retain approximately 50c in every dollar earned. Check the tax scales to see how it may play out for your friends.
Note different countries have different tax treaties and arrangements so make sure your friends seek specific tax advice about any of their plans from someone suitably qualified.
It is possible to have 'two loans' and to technically borrow over 100% (in total for a property) I'll show you what I mean.
Let's assume they buy a property for $500K. They will need an additional $25K to pay for purchasing costs.
They can use line of credit funds of $125K to pay for their deposit and costs. This loan facility can be secured by their existing home.
The balance remaining $400K can be a separate loan facility and is secured by the investment property. In addition this second loan does not need to be with the same bank as the line of credit.
In this scenario the interest on both loans is fully deductible as the funds have been used to purchase the investment property.
I am not a broker so someone will come along and clarify/confirm this for you.
dgirl wrote:So with this in mind, which strategy is better:
1. sell the PPOR & pay cash for the deposit on 500K IP with 450K loan 450K in offset
2. sell the PPOR & pay cash for the deposits on two IPs (and borrow more funds)
3. release the equity, and buy a 400K property
Option 3 wins for me.
Hope this helps.
Yes, it does help Derek — alot
In the above example (400K loan plus 125 LOC) would you suggest a 400K IO loan, with offset? Do they aim to pay down the 125K LOC?
Cheers
It will depends upon the long term objectives of the people concerned.
Given they have no other debt – paying down the LOC has some attractiveness to me. Offset account would be better.
I agree with Dereks advice. For someone that's not a broker thats good solid advice. Option 1 would be a waste of time. Nothing to claim against your rental income come tax time.
Just thinking out loud, would the bank allow option one? They wont be happy if they can't make a profit on you.
dgirl wrote:So with this in mind, which strategy is better:
1. sell the PPOR & pay cash for the deposit on 500K IP with 450K loan 450K in offset
2. sell the PPOR & pay cash for the deposits on two IPs (and borrow more funds)
3. release the equity, and buy a 400K property
…any other options?
1.
The lose the CGT exemption and have no better tax deductions than before. They also incur selling costs and buying costs.
2. Selling costs and buying costs, but they have $400,000 cash to invest elsewhere – which they will still pay tax on.
3. This would create some losses which could offset the rent the receive on the old PPOR which could still be tax free. Only worth doing if the new property will grow more than the losses though.
4. Use a discretionary trust to invest by securing a LOC against the PPOR and borrowing to buy more property. Adds good asset protection and sets up a tax effective vehicle for the new investments.
But if they are going overseas and will become non residents then they need specialist tax advice first.
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
Point 4 is very pertinent.
You may get more bang for your buck paying down the LOCKS as it will have a higher rate of interest compared to the savings achieved putting money into the offset a/c.
I would go with the option 3: to keep the house and invest in 400k property. But for your security I would consult with a broker before making any decision.
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