Hi All,
I bought a townhouse at Mawson Lakes at SA when I was working overseas and wasn't educated about the tax system in Australia. I paid off the mortgage within three years while earning oil money at the Middle East, thinking it was the right thing to do. However, when I returned to Australia, I accepted a job offer in Melbourne and bought an apartment in the city on about 70% mortgage. I learnt it the hard way when I received a tax bill for my other income (other than salary) of almost $6K for the last financial year. I almost fainted!
So, my question is, should I sell the townhouse in SA and use the money to pay off my current PPOR in Melbourne? My problem is, the townhouse has not made any capital gain at all after 5 years! My broker advised me that I should keep the SA home and use it to apply for a line of credit to use for investment properties. I eventually bought one investment property using the line of credit to pay for 20% of the property price plus purchasing cost and interest only loan for the remaining 80%; however, after doing the calculation, I will still have the annual tax bill but maybe a reduced amount.
My partner reckons that by buying more properties, I am just wasting more money on the interest payment since there is always a couple of hundreds dollars to make up with the negative gearing.
What do you guys think? To sell or to keep my fully paid SA home?
If it rents well and you are concerned with the tax bill, you could always sell it to an entity controlled by you.
You have had no CG so CGT is not an issue, but would have to pay stamp duty and legals on purchase in the new entity.
$400k property would pay $16k in stampduty, and your new entity would borrow as much as possible and you would have an injection of cash and entity would have tax deductible loan.
However, as it has not had any CG, it may be better to sell it and buy a new one in an entity.
The worst scenario would be selling it and not replacing it with some sort of investment.
You have time, research all possible scenarios and that will help you make the best decision
RPI | Certus Legal Group / PRO Town Planners
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I must admit i am concerned why there is still a couple of hundred of dollars shortfall after you have purchased another IP.
Are you sure you are claiming all you are entitled to ?
I will also assume you have done the numbers on a part or full Spousal Transfer considering the CGT and SD.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi LC888
Is your mortgage broker rich as a result of investing in property? If not I'd tread with caution following his/her advice. You want to take advice from, and copy the actions of, people who have already gained wealth using the exact same vehicle you are trying to use (ie property).
Do you happen to have depreciation schedules on either of the investment properties?
Jacqui Middleton | Middleton Buyers Advocates
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Jac that was the first thing of many i was thinking.
Forget a Spousal Transfer i think i would be looking at a Broker Transfer.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks all for your comments.
I have decided to take up an interest only loan which in effect makes my investment property a positively geared property. That doesn't help with my tax situation of course. I was naive thinking that I would pay the same amount monthly but the whole payment goes to the interest instead of partially to the principal but of course it just means I pay less monthly when I opted for interest only loan. Should i change it to principal and interest loan as soon as I can do so without penalty?
I sought further advice from an ANZ financial planner who advised that I should really look at low returns properties which will have better capital gains within 15km from Melbourne CBD. I could do this with the line of credit I had applied secured against the property I own fully in Adelaide.
Do you think securing my fully paid property in Adelaide for a line of credit to use for payment of 20% of more investment properties is a bad idea and that I should just rather have a fully owned property with rental income and pay 38.5% of it to tax?
No, I don't think my mortgage broker is rich. Never really asked!
Yes, I did have depreciation schedules etc for the property in Adelaide but still wasn't enough to offset my tax. I think I might need a good tax accountant too.
Should I really be sacking them all and get a new mortgage broker and a new tax accountant? Anyone has any recommendation?
LC888 sorry to appear niave but i am not sure how buying a property with poor rental income but good capital growth prospects will aid your cash flow position.
Surely would it be a matter of buying properties that wash their face when it comes to the interest costs and that with a few dollars spent in renovation can add both value and increase the rent.
As a Broker and Financial Planner i must admit i would never be giving a client that sort of advice.
Built my portfolio on a combination of both cash flow and manufactured capital growth.
What happens if the market slows in the future. You have a property that is going nowhere and costing you hard earned dollars.
There are many ways to reduce your Tax position improve your cash flow without it costing you a fortune.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
What is the net operating cost per month to hold the property and what is the anticipated annual CG?
As it is a townhouse you would be restricted in 'manufacturing' CG.
Regards
Shahin
TheFinanceShop | Elite Property Finance
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Qlds007 – I guess as my primary concern is to offset tax, the advice I was given was not to focus on the rental income but the capital growth potential. I was going to focus on regional Victoria at areas I think may have capital gains but still provide good rental income. However, I guess the general view is that regional Victoria would have less likelihood of capital gains in comparison to suburbs closer to Melbourne. I spoke to three financial planners to date who introduced other common ways to reduce tax, such as salary sacrifice in contributing more to my Super etc., and investing in managed funds; however, my issue is that I don't actually have any spare cash every month to contribute more to Super and my lifestyle is still somewhat negatively geared at the moment. Therefore, I don't want to have to pay extra tax at the end of each financial year because of the IP I fully own in Adelaide.
Shahin, last month, the net operating cost was $505.41. I bought the townhouse in 2007 for $375,000; it was appraised last year by my agent to be priced between $365,000-$385,000. When I applied for a line of credit using the townhouse as a security, it was valued by ANZ at $383,000. Therefore, annual CG is almost negligible.
Its always a hard decision. It is costing you $6k per annum so the question is will the CG even in the long term outweigh this? If you do sell the property is there another IP vehicle that you have seen that has better numbers? i.e. Is it worth cutting your loses and changing strategy?
Regards
Shahin
TheFinanceShop | Elite Property Finance
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Agree with Richard. Deliberately looking for a low yielding property just to reduce tax is poor advice, in my opinion.
Re: what should you do – it depends on your goals and priorities. I would look to using the equity in your SA townhouse to help purchase more property. But only if this fits with your long term goals.
Re: tax – Paying tax means you are making money. If you have done everything to minimise tax (depreciation etc) then paying tax is not necessarily a bad thing. Would you rather 62.5% of something, or 100% of nothing? Tax consequences forms part of the decision making process, but it shouldn't be the main factor, and other costs also must be taken into account. (Selling agent's fees, for example.)
Buying more property could help you reduce tax, while increasing your asset base. That's what I'd be doing.
LC888 wrote:Shahin, last month, the net operating cost was $505.41. I bought the townhouse in 2007 for $375,000; it was appraised last year by my agent to be priced between $365,000-$385,000. When I applied for a line of credit using the townhouse as a security, it was valued by ANZ at $383,000. Therefore, annual CG is almost negligible.
How much rent are you receiving for the SA property?
$1,564.29/month
Don't think there's really any CG. I bought the unit when I was working overseas thinking that when I return to Australia, I would want to live in it; hence, I paid it off, but ended up with a job in Melbourne. I would still like to live in this townhouse when I retire, perhaps.
If I sell the SA property, I might as well use it to pay off the mortgage of the apartment I'm currently living in, which has $350K mortgage on it.
However, I have now secured the SA property for a line of credit which is still being settled (tomorrow) and I will use up that line of credit to pay for 10% of my IP at Hastings (regional Victoria), the purchasing cost, conveyancing fee and some repair works for both my IP at Hastings and SA.
Thanks Dan. I've since done that as I didn't get much response to my post earlier on!
Now, where to invest – regional Victoria with good rental yield and risky in terms of CG or suburbs around Melbourne which is less risky in terms of CG but would have less rental yield? I bought one IP at Hastings, Victoria using my SA property line of credit for the downpayment (unfortunately, made another mistake as my broker told me I could pay the 10% deposit using my own cash and once the line of credit is settled, I can reimburse myself. Found out from my tax accountant that if I reimburse myself, the interest on that amount is not tax deductible. I have to make all my payments directly from the line of credit to the external third party). As the property at Hastings is quite cheap, I can afford to buy another property. I was thinking of Geelong area (Newcomb) but getting conflicting advice from people around me, hence, now, thinking twice if I should focus on western suburbs around Melbourne (15km from CBD or thereabouts), which is still affordable ($450K) instead of Newcomb ($300K).
What do you think?
LC888 wrote:I was thinking of Geelong area (Newcomb) but getting conflicting advice from people around me, hence, now, thinking twice if I should focus on western suburbs around Melbourne (15km from CBD or thereabouts), which is still affordable ($450K) instead of Newcomb ($300K).What do you think?
I don't know the area all that well, so I'd be reluctant to comment. All I can suggest is keep doing your research and your sums, and you will work out the way to go that best suits your goals.
Another thing I'd say is that while it's great to have people around you that can give you advice, you will need to filter out some of the less helpful advice as you progress. What best suits others will not necessarily best suit you, so others advice can be distracting, even if it is well-meaning.
Thanks Dan.
I've asked this question to my broker before and she said there's no such thing but today, my boss suggested the same thing again:
– Is it possible to remortgage my fully owned property in SA and use that money to pay for my property in Melbourne that I am currently living in? …which means my IP in SA would be on mortgage and I would fully own the property I'm currently living in, in Melbourne…
LC888 wrote:Thanks Dan.I've asked this question to my broker before and she said there's no such thing but today, my boss suggested the same thing again:
– Is it possible to remortgage my fully owned property in SA and use that money to pay for my property in Melbourne that I am currently living in? …which means my IP in SA would be on mortgage and I would fully own the property I'm currently living in, in Melbourne…
Security of the loan doesn’t matter it is the purpose of the loan, ie where the money goes that counts. In this case you will be borrowing money for your new main residence so it is a private expense and not deductible.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Thanks for the response, Terry. That's what I thought. So, really, no way to reverse the non PPOR which is fully owned with my PPOR which has a mortgage! My finance is so screwed up. LOL.
Another question – is remortgaging the same as having a line of credit using my fully owned home as an equity?
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