First investment property in Sydney (Tax help please!)

Hi there

I'm not an accountant so won't get into the specifics of your taxation related questions.

As a general comment though – I would never purchase an IP with the main motivator being to reduce your tax billed. The logic is flawed – you need to lose a dollar to get 40 cents back.

While the tax cuts associated with IPs are fantastic, I'd only view them as an added bonus.

Cheers

Jamie

Its not a very stable strategy to purchase property based primarily on negative gearing. Why do you want to lose money and hope for CG in the future? 

There are no issues with negative gearing however have a plan to turn it into either cashflow positive property or ascertain CG/equity to build your portfolio from there. 

You can claim one property at a time as your PPOR so look at your longer term plan it may worthwhile living in the property first and then renting it out.

Regards

Shahin

If this is going to be an investment then I would suggest you borrow 105% even if you have the cash. You can structure this so as to save more tax.

You might also consider charging your parents market rent – even if you have to gift to them money to help them pay their rent.

Do you currently own property? What is the equity that you have in your current property?

Regards

Shahin

Dom,

there are many potential ways to structure something like this.
1. Use other proeprty as securty
2. Use other property to set up a LOC
3. Gift and borrow back strategy with a trust
4. Spouse lending you money
5. cash deposit

With 3 and 4 you could effectively increase tax deductions while diverting income to the spouse. 3 can offer significant asset protection advantages too.

Here is an example of what I mean:

Existing Property:

Loan A/C 1 – $x (Purpose is the 20% Deposit for the IP purchase – this will be tax deductible as the purpose of the funds are for the purchase of the IP)

New IP Property:

Loan A/C 2 – $x (Purpose is 80% of the IP purchase – this too will be tax deductible as the purpose of the funds are for the purchase of the IP)

You will need to submit 2 separate applications to ensure that the bank doesn't link the properties and in turn have more control of your properties than they need to.

Regards

Shahin

Hi Dom,

I think you need to look at your situation from a broader point of view – you have equity in your own home and I assume as any reasonable person want to maximise your future wealth via investing in property as well as via minimising the tax that you are currently paying.

The correct way of structuring this purchase really depends on your overall objectives, let me explain why:

One way to purchase investment property would be to borrow 80% from the bank and then pull out the remaining 20-25% from your own home, this way all of your expenses will be 100% tax deductible. However, buying one property is not really going to make you wealthy so if you are planning on purchasing multiple properties then you may want to structure your deal a bit differently – borrow 95% from the bank, pay LMI and pull the rest from your own home. This way you will get around 90k at a cost of around 12% p/a so you need to have a way to invest the extra cash at the return higher than 12% p/a.

Renting the townhouse to your parents in the future at anything but market rate is not a good idea because ATO has specific provisions around it and will consider your expenses non tax deductible.

Regarding your question on whether to purchase property in your own name, jointly with your wife or in the trust the answer really depends on your particular circumstances. For example is your wife going to be working continuously for the next 5-10 years or is she planning to take a break for a few years? Purchasing property in trust is a smart way to minimise tax, especially if you have parents who don't work. However the problem here is that $600k townhouse is likely to generate losses for many many years to come and standard discretionary trust does not allow distribution of losses. You can set up what is called a hybrid trust which initially will distribute losses to yourself and then at a later date convert to discretionary trust so you can distribute gains to your wife and parents, however I am not a specialist in this area and ATO has previously raised a number of issues with poorly structured hybrid trusts.

I hope you can see from the above that nobody on this forum can give you a definite answer as there is so much to consider, on the other hand this is not a rocket science so any good accountant should be able to give you a more definite advice (I wish it was that simple).

You need to run a discounted cashflow analysis for different purchase scenarios and look at the NPV for each of them, this way you will be well equipped when evaluating the best scenario with your accountant.

I would suggest that in the analysis you consider the following details:

– Expected rental yield

– Are you going to manage it yourself or get agency to manage

– Are you going to purchase a run down property and renovate to add sweat equity

– Capital growth expectations

– Holding horizon 5 years, 10 years or forever

And finally, have you considered purchasing a few cheaper investment properties instead of more expensive ones? For example you can buy two properties for 250-300k each and get around $700 p/w in rent meaning that these properties will be cashflow positive from day one. If you think that more expensive properties located close to the CBD appreciate more in value then as an option you can sell your home and buy more expensive one thus increasing your exposure to the property market and saving on the future CGT.

Regards,

EW