Advice on PPOR to IP and finance

[adamjd]

Hi, long time lurker 1st time poster.

I've read some threads regarding PPOR to IP (thanks TerryW, Rolf and others for some great info)as my wife and I are considering this soon. Some info on our current situation and what I'm looking to do.

We currently own our home in Ringwood and dont have any debt against the property, the house would be valued at around $500K. We have an interest only loan with a limit of $150K, around $58K had been drawn down on this for investments, value of investments approx $100K, we have $58K sitting in an offset account. Our home is security for the loan.

I have found another home that we are looking to purchase in Warrandyte, purchase price approx $850K, I'm estimating $50K costs so $900K needed. We would purchase this home in my wifes name.

I'm not wanting to sell Ringwood at present so am thinking of purchasing my wifes share of the property for $250K with IO loan and placing the funds in an offset account until needed for our new PPOR purchase. We would then have a deductible loan on Ringwood for $250K and a non deductible loan on Warrandyte for $600K (the $50K costs will be paid with cash).A few questions with this.

1) Is the process for spousal transfer as simple as deciding the value by obtaining some recent sales data of comparable houses in the local area, then complete a form from the titles office and have the bank organise the finance? If anybody who has been down this path or is familiar with the steps could provide me with some guidance it would be much appreciated.

2) I've been reading the info on the ATO website and I might be mistaken but I understand that I can claim Ringwood as my PPOR while I'm not living in it for 10 years and of these years it can be income generating for up to 6 years. I found the info a little confusing so hopefully someone can help me here. I was also wondering about the process of 'claiming' a place as your PPOR. Is this something that is done on your tax return when you have sold the house or is there something I need to do now?

For the $150K investment loan, I would like to change that to LOC with $100K limit. Any advice from Brokers would be great here, my Ringwood property is currently being offered as security. Will any banks let me offer the shares and managed funds as security?

Cheers

 

[Aaron_C]

1) Just use the bank's valuation figure.

 

[adamjd]

Thanks Aaron. I thought (assumed) the bank vals would be conservative vals thus limiting the value I pay my wife. Am I off track here with bank vals

 

[Peter_Tersteeg]

Ultimately the banks are going to use their valuation for the transfer, so you might as well simply go with that anyway. Their result will dictate how much you can borrow against your property.

You can continue to claim the property as a PPOR even when you don't live there as you describe. Keep in mind that you only get one PPOR at any one time, so purchasing another home where you live will mean no more CGT exemption on property 1 from that time. You may want to get a valuation done at that point so you've got solid figures for when you do sell the property.

A LOC is very similar to an investment loan, is there any particular reason why you want to change? The process is really simple. As for a limit reduction to $100k and to switch from one loan type to another.

I would however, consider a full refinance of all lending against the property. At this point the loans are likely in joint names. When the transfer occurs you might be better served by re-originating the loans (setting them up from scratch) solely in your own name. What you're planning to do is possibly not going to sit well with the ATO and this process would make your arguments a bit stronger.

 

[adamjd]

Cheers Peter,

Just to clarify a couple of points

Ultimately the banks are going to use their valuation for the transfer, so you might as well simply go with that anyway. Their result will dictate how much you can borrow against your property.

Sure I understand what you're saying but we dont have a loan for the property so I'm looking to borrow 50% of the value....which can be a rubbery figure. The reason I would rather not use a bank val to calculate the price that I acquire my wifes 50% share is that I assumed they used a conservative val, please let me know if I'm off track.

You can continue to claim the property as a PPOR even when you don't live there as you describe. Keep in mind that you only get one PPOR at any one time, so purchasing another home where you live will mean no more CGT exemption on property 1 from that time. You may want to get a valuation done at that point so you've got solid figures for when you do sell the property.

I'm planing on claiming the Ringwood property as my PPOR for the next 6 years while it is rented out. Our home (we hope in Warrandyte will be only in my wifes name and will be her PPOR so as far as I know we dont lose our CGT exemption.

A LOC is very similar to an investment loan, is there any particular reason why you want to change? The process is really simple. As for a limit reduction to $100k and to switch from one loan type to another.

The reason for this is that I am currently contributing $500 per month to a couple of investments. The contributions are coming from my cash as this investment loan doesnt accept debits :S. It was originally set up as a LOC but the bank suggested this new structure which is really not functional. In addition, I can't link this to my online trading account so a LOC will be a more functional loan for me.

I would however, consider a full refinance of all lending against the property. At this point the loans are likely in joint names. When the transfer occurs you might be better served by re-originating the loans (setting them up from scratch) solely in your own name. What you're planning to do is possibly not going to sit well with the ATO and this process would make your arguments a bit stronger.

Agreed, the investment loan is in joint names sorry I should have mentioned this in the original post. As the Ringwood property is offered as security against this loan, as the investment loan is a joint loan and the Ringwood property will be transferred to my name I'd like it secured against the underlying investments if that is going to be possible. With regards to what I'm proposing not sitting well with ATO are you able to give your thoughts on which elements of the transaction may not sit well with them.

Cheers

 

[Aaron_C]

Banks only take managed funds and shares as security for margin loans - which attract higher rates than home loans. You will have to offer real estate as security for a LOC.

 

[adamjd]

Thanks Aaron so i guess then i need to work out how the Loc will b secured considering it it in joint names and each of the properties will b in sole names....or is that not a problem as long as the bank has sufficient security held in the name of one of the borrowers

 

[Peter_Tersteeg]

Sure I understand what you're saying but we dont have a loan for the property so I'm looking to borrow 50% of the value....which can be a rubbery figure. The reason I would rather not use a bank val to calculate the price that I acquire my wifes 50% share is that I assumed they used a conservative val, please let me know if I'm off track.

Regardless of who does the val, it's the bank that is going to lend you the money. They amount they'll lend is based on their valuation (not yours). Even if you get a higher figure elsewhere, it's likely to be irrelevant.

It is fairly easy to order a valuation using the same valuer as the bank, but you may find that all valuations are being conservative these days.

I'm planing on claiming the Ringwood property as my PPOR for the next 6 years while it is rented out. Our home (we hope in Warrandyte will be only in my wifes name and will be her PPOR so as far as I know we dont lose our CGT exemption.

I don't know the answer to this, but you might want to check with your accountant if the PPOR exception applies to the couple or to the individual.

The reason for this is that I am currently contributing $500 per month to a couple of investments. The contributions are coming from my cash as this investment loan doesnt accept debits :S. It was originally set up as a LOC but the bank suggested this new structure which is really not functional. In addition, I can't link this to my online trading account so a LOC will be a more functional loan for me.

Fair point, a LOC achieves this fairly easily. Depending on the lender, it can also be done with a investment loan.

Agreed, the investment loan is in joint names sorry I should have mentioned this in the original post. As the Ringwood property is offered as security against this loan, as the investment loan is a joint loan and the Ringwood property will be transferred to my name I'd like it secured against the underlying investments if that is going to be possible. With regards to what I'm proposing not sitting well with ATO are you able to give your thoughts on which elements of the transaction may not sit well with them.

You need to get our accountants opinion on this. You're doing this to optimize your tax position (which is fine as far as I'm aware), but another interpretation may be that you're trying to avoid tax (which isn't okay). Personally I agree with what you're doing, but you might want to be cautious.

 

[adamjd]

Regardless of who does the val, it's the bank that is going to lend you the money. They amount they'll lend is based on their valuation (not yours). Even if you get a higher figure elsewhere, it's likely to be irrelevant.

It is fairly easy to order a valuation using the same valuer as the bank, but you may find that all valuations are being conservative these days.

OK but lets say I can obtain some data to support a val of $600K I apply to the bank to borrow $300K. If the banks val comes in at $500K (as the banks may use conservative vals) I will still be OK to borrow $300K without LMI. By using my data supported val for the ATO rather than a conservative bank val, I can increase my deductible borrowings.

You need to get our accountants opinion on this. You're doing this to optimize your tax position (which is fine as far as I'm aware), but another interpretation may be that you're trying to avoid tax (which isn't okay). Personally I agree with what you're doing, but you might want to be cautious.

No no not optimising tax position at all just optimising asset protection.

 

[Aaron_C]

Best speak to your broker/banker about what you should do next. This is a big cash out so better structure it properly to avoid cross coll etc.

 

[Rob G.]

I'm planing on claiming the Ringwood property as my PPOR for the next 6 years while it is rented out. Our home (we hope in Warrandyte will be only in my wifes name and will be her PPOR so as far as I know we dont lose our CGT exemption.

You only get at most one main residence per couple.

You need to decide which one, otherwise each only gets an exemption for half the time on their own.

You said you were planning on nominating your old main residence for the absence rule.

Cheers,

Rob

 

[Terry_w]

You need legal and tax advise as you seem to be doing this for the dominant purpose of saving tax. If you set it up in correctly then you may be just wasting your time.

You would buy your wife's share for $250k. You will need to redo the loans and hand over $250,000. (make sure she doesn't run off with it!). This will probably be CGT free to her. But for you, in the future you will find it easier to think you have 2 separate interests in the property. 1 half which was your main residence and the 2nd half which is the new investment. If you didn't have a spouse you could only claim a CGT exemption on the first half as you would not be able to claim the 2nd half as your main residence because you are renting this half - but if you remain in the house for a while you possibly could.

But you do have a spouse, and therefore you can only claim one main residence between you.


You also have an existing loan of $100k. Is this secured on this same property?

Why have you borrowed to park money in an offset account possibly destroying deductibility of this. Sounds like you have used $42k of this to invest. So 42% of the interest of this loan should be deductible. You could argue over the other 58%.

I think you need to get some good advice on how to fix this loan potential problem. Perhaps repaying the money in the offset will save you.

This loan could also be split and secured over the old PPOR. It will need to be redone because ownership is changing.

So you would have 2 loans:
$250k
$42k
-----
$292,000 = 58% LVR

You may want to consider a third loan which could be taken so the LVR goes to 80%. This could be used now or later for investment or for assistance in purchasing the PPOR - but don't mix purposes.

You should also get your own valuation done and tell the valuer what yuo want it for and would like it as high as possible.

This will assist you borrow more, possibly, and also save you CGT in the future.

 

[adamjd]

Thanks Terry

But you do have a spouse, and therefore you can only claim one main residence between you.

Hmmmm Ok, so spousal tfer is mainly to be able to claim deductions on the expenses of the property rather than CGT exemption.

Why have you borrowed to park money in an offset account possibly destroying deductibility of this. Sounds like you have used $42k of this to invest. So 42% of the interest of this loan should be deductible. You could argue over the other 58%.

I didnt.......the loan was used to purchase investments, the offset account has been used to park surplus cash and over the last couple of years has grown to the size of the loan. I have a limit of $150K and have drawn down $58K, for the last few years I've been using cash for further investments....due to the limitations of the loan. I now want to make it LOC so I can continue drawing down for further investments rather than using cash.

 

[Terry_w]

Thanks Terry


Hmmmm Ok, so spousal tfer is mainly to be able to claim deductions on the expenses of the property rather than CGT exemption.



I didnt.......the loan was used to purchase investments, the offset account has been used to park surplus cash and over the last couple of years has grown to the size of the loan. I have a limit of $150K and have drawn down $58K, for the last few years I've been using cash for further investments....due to the limitations of the loan. I now want to make it LOC so I can continue drawing down for further investments rather than using cash.

Sorry, I jumped to the wrong conclusion there. It is good that you didn't park money in the offset.

I would be inclined to have this loan as an IO loan and then set up a separate LOC to be used for further investments.

 

[adamjd]

Thanks Terry, not sure why the loan would be split into io and loc. Will b interested to hear why.....btw i love strategy, i believe strategy is what makes you money im sure others may disagree

 

[Terry_w]

Thanks Terry, not sure why the loan would be split into io and loc. Will b interested to hear why.....btw i love strategy, i believe strategy is what makes you money im sure others may disagree

Well, it depends on a few things. Whose name was the investment made in. And whose name will you invest in the future? It is also good to keep things separate - although still ok in some instances to have combined loans if all investments.

Also you would get a lower rate possibly - not much on $50k but still...

I love strategy too. I am a strategic strategist.