Agggh - got to move.. but sell up, or rent out?

[DadAgain]

1st post - so sorry if a bit of a n00b or asking a stupid question!

I anticipate being offered a job soon in Canberra. Some people might think of Canberra as a frozen culture-free desert, but for one reason or another it might make good sens for me to go.

Problem is we have our house that we really like in Brisbane (The Gap).

Its my belief that with Brisbanes population set to continue growing and with development restricted to various 'zones' that our house will continue to increase in value and I'm scared that if we sold up and bought in ACT we'd never be able to move back! (and also acutely aware of the possibility of wanting leave Canberra after not too long and return to sunny Qld!)

SO - that leaves 2 possibilities:
1) Rent out our BNE house for the highest possible amount (Looking at realestate.com.au $450pw looks about the max we could hope for, but having said that I cant see any other rentals with pool and ducted aircon and I have NO IDEA how much value they add?!) and hope we can get something livable in Canberra without having to pay too much more (preliminary investigations suggest $500 a week should get us something bearable)
or

2) Do something a bit clever: double our debt on the BNE house to $500K (we owe $250 and it'd be valued at $600ish), create a very negative geared investment and use the excess cash generated from the refinance as a hefty deposit on a Canberra home.

As far as I'm aware, we couldnt refinance AFTER getting tennants as the refinanced amount would then clearly not be being used for profit generation, but if we refinanced now (and left the excess cash in an offset account until we needed it) - would then we be able to tax deduct the whole $500k instead of just $250k? (If not whats the difference between a refinance now and the one we did 3 years ago to raise funds for a car?)

Can you rip my plans to shreads and tell me why option 2) is stupid or illegal? Do you think my basic hypothesis that BNE prices will grow more than ACT is a valid one? (Obviously nobody *knows* for sure)

Any thoughts would be appreciated (or even recommendations of financial planners/mortgage brokers who might be able assist in this type of thing)

 

[alexlee]

　2) Do something a bit clever: double our debt on the BNE house to $500K (we owe $250 and it'd be valued at $600ish), create a very negative geared investment and use the excess cash generated from the refinance as a hefty deposit on a Canberra home.

Unfortunately not legal. If you refinance and use the excess cash as a deposit for the Canberra home you live in, then you can't deduct the interest on that.

As far as I'm aware, we couldnt refinance AFTER getting tennants as the refinanced amount would then clearly not be being used for profit generation, but if we refinanced now (and left the excess cash in an offset account until we needed it) - would then we be able to tax deduct the whole $500k instead of just $250k? (If not whats the difference between a refinance now and the one we did 3 years ago to raise funds for a car?)

There is no difference. None of it is deductible. The test is what you use the money for. Ultimately the money from your refinance is going towards your new PPOR, which does not generate income and thus is not deductible.

You can't just refinance, put the cash into an offset account, use the money in the offset account to buy a Canberra house and deduct it. Just passing the money through an offset account doesn't change the (lack of) deductibility.

Can you rip my plans to shreads and tell me why option 2) is stupid or illegal? Do you think my basic hypothesis that BNE prices will grow more than ACT is a valid one? (Obviously nobody *knows* for sure)

Not stupid, but unfortunately illegal. I don't know whether BNE prices will rise faster than ACT, but I do know the more property you hold the bigger your assets in the future.

With that in mind, one possibility is keep the BNE place AND buy the Canberra place. At that sort of rent and only $250k loan it'll be pretty positive. For example, say you buy a place in Canberra for $500k. You could refinance and take $125k out of your Brisbane property (all non deductible debt), use that as a deposit for your new PPOR in Canberra, and then save like heck to pay it down.

Unfortunately, there isn't really a way you can free the equity with deductible interest, unless you do something exotic like capitalise interest and use rent to pay off the non-deductible part. This is something I haven't worked out completely and there are lots of different opinions on it.
Alex

 

[DadAgain]

Bugger...

Thanks for the clarification though. I'd definately like to hold on to the Brisbane house - but even if it rents out positive it wont be my much and whether we could afford mortgage twice as heavy as we currently have is doubtful....

I guess we're doomed to live as tennants!

 

[geoffw]

Unfortunately, there isn't really a way you can free the equity with deductible interest, unless you do something exotic like capitalise interest and use rent to pay off the non-deductible part.

Or sell the PPOR to a trust. It will cost you up front in stamp duty, but save you tax- potentially a lot- further down the track.

A Hybrid Discretionary Trust may help to make the deductions deductible- get professional advice.

 

[wylie]

Doesn't selling the PPOR to a trust remove its capital gains tax free status?

I know my parents were discussing this with an estate planner and I thought this plan was decided against because once it went into a trust, it meant it was no longer excempt from capital gains tax.

Confused ......

Wylie

 

[alexlee]

Doesn't selling the PPOR to a trust remove its capital gains tax free status?　

Yes, but if he's going to buy a new PPOR in Canberra, the CGT exemption ends anyway.
Alex

 

[geoffw]

Yes, but if he's going to buy a new PPOR in Canberra, the CGT exemption ends anyway.

... and CGT exemption starts on another property.

I have no crystal ball. I don't know where demand will be, and what supply will be.

But my properties in the Canberra area- especially in Queanbeyan- have risen strongly in the last year, to my surprise. Vacancy rates have been low in the ACT, and that has pushed up rents (I recently relet a house which was at $250pw- I've added use of a LUG, the rent is now $350pw). So don't write off Canberra completely.

www.allhomes.com.au specialises in Canberra, and is perhaps the most information rich property website anywhere in Australia.

 

[austini]

Your post seems to suggest that there is a possibility you may want to return to Brisbane. So unless you are absolutely sure that you intend staying in Canberra for around 7 years I would be tempted to hang onto the Brisbane property. We found from painful experience that it is not always wise to jump in and buy another PPOR until you are reasonably sure that you will live in that property for an absolute minimum of 5 - 7 years. Unless your timing is good which when moving due to work may not be the case it is very easy to lose money on a property if the timeframe is less than 5 years.

So perhaps at least consider renting the Gap property out for 12 months and rent in Canberra during this time. That way you will get a good feel for where you prefer to live in the ACT and whether you think you can live there long enough to warrant purchasing a PPOR or continue to rent. At that stage it is highly likely you will be much clearer about your decision rather than trying to decide now.

In terms of Brisbane vs Canberra well the ACT is certainly still heavily reliant on Government and changes in Gov't policy there can still have an impact. Others might like to correct me as I haven't researched the area in recent times but Canberra's "permanent" population growth on average tends to be relatively low. That said, the market seems strong down there at the moment. However there is no end in sight for the incredible population growth that is happening in Brisbane which looks set to continue long term. Every real estate analyst's report I have read for some time now states that the outlook for south-east Queensland is very good.

Also you may be aware that if you keep your Brisbane property and return to it within 5 years after renting in ACT you still retain the CGT exemption. So you get all the benefits associated with it being a rental property and provided you return to it within 5 years it then reverts back to having all the benefits assocated with being a PPOR. Of course you can't have had another PPOR during that time.

However I will say that we really enjoyed our 10 years in Canberra especially after moving into the Kingston area. We were only about a minutes walk to Green Square which is still one of the best cafe precincts we have ever come across. The lifestyle was awesome.

The funny thing is that we are now in Brisbane and not all that far from you in Bardon. As for the cold climate in ACT my wife would gladly be back there any day especially when the Brisbane summer arrives.

Cheers

 

[wylie]

Thanks Alexlee. I did not think that through. My parents were still going to live in their house as their PPOR, and that is the difference.

I must have been having a senior moment

Cheers, Wylie