Are we crazy to have debt on our PPOR if we have equity in IP

[always_learning]

Are we crazy to continue to have debt on your PPOR if you have equity in IP?

In the thread:Can you drawn down equity from IPS to pay off PPOR?

WillG wrote:

Hi Bundy,

excerpt from a previous post (similar to what you are saying )...

I guess another way to draw down on equity from an IP to pay down your PPOR is to refinance the IP, buy an annuity aka 'Steve Navara Cashbond' and deposit the annuity income onto the PPOR offset account. This may take a minimum of 1 year I believe because the minimum length of an annuity is 1 year.

This should work because buying an annuity/Cashbond returns interest + capital thus intrest can be claimed on the IP loan

Well this has got me thinking
I would like to present a conjecture for discussion.

Conjecture:"Never have debt on your PPOR if you have any equity in your IP's*

• Cashbonds appear to be on solid legal ground.
• Given the above; cashbonds could be used to transfer equity from any IP's you have now since cashbond annuity payments could be used to paydown debt against your PPOR.
• I understand the interest rate differential between a cashbond and a LOC mortgage is 2%. Thus the cost to move equity from your IP to PPOR will be 2%. If you owe 200K on your PPOR and have $200K worth of spare equity in IP's, get a $200K LOC on your IP's, buy a one year cash bond paying $16.6K/month, use that $16.6K to pay down principle on the PPOR.

 

[WillG]

Hi Always,

There are always two sides to the picture.

If the Cashbond scenario works (I thnk it should), your income in the year you are using the Cashbond will greatly increase, you may be pushed up in tax brackets and will pay more income tax on your day job income.

 

[agent007]

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your income in the year you are using the Cashbond will greatly increase, you may be pushed up in tax brackets and will pay more income tax on your day job income.
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WillG,

My understanding is that even though one adquires an extra income stream via "cashbond", it is not taxable since it is pure capital product of a loan. ATO doesn't tax capital. The only portion that would be taxable is the interest generated by the cashbond, which would be offset by the interest of the Bank's loan (product of morgage top up of the IP).

Always_Learning,

To be safe, before borrowing money for the cashbond, it's recommended that one applies to the ATO for a private rulling. You should explain what's that you're traing to achieve (increase serviceability to buy an income producing property). You have to prove to them that your are not doing this for a TAX advantage like paying ones PPOR (converting a none deductable loan into a deductable one).
This is what I learnt in Steve's course and by reading hundreds of threads. Please, let me know if I'm missing something.

Regards,
James

PS. I also want to get rid of my PPOR loan

 

[Jackass]

Hi guys. I was about to post a similar question.
Sorry Always_Learning, but slightly off-topic:

If a Cashbond is purchased by the trustee of a family trust and income stream distributed to a beneficiary is this taxed as income to the beneficiary or is it seen by the ATO as a return of tax-free capital as James said?

Can Cashbond income be seen one way by the banks (as income) and another way by the ATO (capital)?

If it is considered taxable income by the ATO - which I'm pretty sure is not the case - then the trustee of a family trust would be better off revaluing the assets to make a tax-free distribution of unrealised capital gain from trusts 'revaluation reserve' rather than use a Cashbond. Do you agree?

THE JACKASS.

 

[Mikhaila]

If Cashbond treated as an income by ATO you got to be from another planet to talk seriously about it. It just does not make any sense. You pay around 5% interest on it and you pay 30% tax on income stream you get back from it. All of this is to achieve tax deductibility of PPOR… Please enlighten me how it may work.

I read all available information on Steve Navra website(http://www.navra.com.au/articles/cashbondfirst.html) about the cashbonds. I am still not 100% clear how it works in details, but I am clear about the purpose (or at least proposed purpose) of the product – this is to increase your income so you can borrow more income producing assets. Also, it is in black on white stated that it is strongly recommended to obtain private tax ruling from ATO. It is indeed complicated financial product if you have to do that. It will be very interesting to hear opinion from people who used cashbonds.

 

[Brenda Irwin]

I too do not own my PPOR even though I have 20 IPs (also mortgaged).
I read somewhere that the independant feeling of actually owning your own PPOR is something quite unique and ought to be invested in.
So, I've sold one IP (not a great rent yield anyway) for a big enough profit to pay off the IP loan plus my PPOR AND one other IP as well!
Will be enjoying that 'Independant feeling' shortly.
Cheers Brenda

 

[WillG]

Hi Brenda,

Wow - 20 IP's. Are you financially free ?. Do you have to work for a living ?

I believe your PPOR is one of the best investments available in this country. It puts a roof over your head and isn't subject to CGT. It is a good psycological feeling when you pay your PPOR off. It also gives a feeling of independance.

 

[agent007]

Hi JACKASS,


>If a Cashbond is purchased by the trustee of a family trust and income stream distributed to a beneficiary is this taxed as income to the beneficiary or is it seen by the ATO as a return of tax-free capital as James said?

Let me ask you this question: If the same trustee of a family trust applies for a top up of the loans of existing IP and then distributes this money to the beneficiary of the trust. Will ATO tax this income?.

I'm far for been a tax expert but, regardless whether it is a cashbond or loan money, I would say the the money isn't taxable from the trust point of view however, (I guess) it will be taxed at the individual level as an income.
Any accountant here?

>Can Cashbond income be seen one way by the banks (as income) and another way by the ATO (capital)?

In fact, it is. That's how it works.

Regards,
James.

 

[agent007]

Hi Brenda,

Congrats on your achievement!.

Just for the curiosity, How log did it take you to accumulate such a wonderful collection of assets?

Any tips to a novice?

Regards,
James.

 

[Kathryn]

Hi Brenda,

We had that feeling....for all of about 6 months . We decided instead that we should use that equity to get a LOC for either buying another property (which we did) or use it to live on and retire early (well, semi-retire anyway). We bought another house outright with the LOC and are now trying to refinance that one to free up the LOC again. It was a good feeling while it lasted but seemed such a waste to not use the equity.

Cheers,
Kathryn

 

[agent007]

>It was a good feeling while it lasted but seemed such a waste to not use the equity

That's the way to go!!!
Congrats

James.

 

[Brenda Irwin]

Started 5 yrs ago with a cashed in life insurance policy.
Slow in the first few years but went nuts in the past yr & grabbed 15. Bank duly owns 80% but this is rapidly changing as IP values go up. Will maintain the mortgage on PPOR, just won't have the debt and the untax deductable interest.
Secret is a ratio of 1IP for capital appreciation then 3 cashflow positive then another capital one etc.
Cheers Brenda

 

[Tibor]

Congrats Brenda,

I just have a little comment. While you secret makes absolute sense to me, there are cash-flow positive properties with great capital appreciation. Bit harder to find, but exist. I have some.

But basically your strategy is perfect. The portfolio is balanced and growth is still achieved. Very hard to loose on it even in case of some unforeseen / uncontrollable circumstance.

Tibor

 

[geoffw]

Agree Tibor.

My Canberra property which was returning 8.5% when I bought it 12 months ago has had bank revaluation come in today at $375K- purchase was $275K 12 months ago.

It has had reno work. But I bought it with one eye each on cashflow and growth. The level of growth was surprising but welcome- I'll use it.

 

[Sutts]

Hello I am new to this (actually any) forum. I was interested in your discussion especially between Brenda and Tibor. Could you tell me exactly what you mean by cash flow positive? Does that mean after all costs are taken out and including all debt on the property? By all debt I mean if the deposit is secured on a different property such as PPOR do you include the interest on this debt when you calculate whether or not the property is cash flow positive? If you do and you are very continually using borrowing against existing equity to buy more properties, then is really possible to kepp the properties cash flow postive?

Also Tibor, please tell me where these cash flow positive properties with the good capital return are?

We recently bought our 2nd investment property which is returning 5% in rent on the purchase price but we have found that despite this being a good return in the current market it is a long way from cash flow postive because of agents commission, repairs, water rates etc ,etc etc. and to be honest it is hurting our litfestyle much more than we had planned. But we really don't want to sell.

 

[WillG]

Hi Sutts,

Cashflow Positive is achieved when rental return - all expenses is positive. This may be achieved before or after tax

Everybody has a different interpretation of cashflow positive. I look at the figures of my whole portfolio rather than individual IP's and try to be cashflow neutral whenever possible.

'hurting our litfestyle much more than we had planned'

Tell us a bit more about your situation and perhaps you will get some ideas to increase cashflow. What expenses hadn't you considered ?. Have you considered lodging a 221D form to the ATO (if you haven't already done so). Have you considered partially managing the property yourself (collection of rent, regular inspections ...)

Cheers,
Will

 

[Mikhaila]

Originally posted by Sutts
... it is hurting our litfestyle much more than we had planned. But we really don't want to sell.

Hi Sutts,

Have you done tax depreciation schedules for the properties? Depending on what you have you my get substantial amounts back.

 

[Sutts]

Thanks guys,

Your ideas are much appreciated.

We have not done the 221D form yet as our accountant suggested that we start that in the new financial year since there were only a few months left in this one. We have been using the 221D on our first property. When the new financial year kicks in that should help a bit.

A quantity surveyer has had a look at both properties and we have depreciation schedules for both. They are both older houses and although it is surprising how much you CAN claim it is still not a huge amount.

Both properties are on the central cost and we live in Sydney so property management might be a bit difficult. Also we have two small children and work most of the time so we are both pretty flat out. I think taking on property management would give more stress than it would save.

By the way we have made great capital gains on both properties, even the second one, judging from other sale prices in the area.

 

[Donna L]

I too want to get rid of PPOR debt (so I can start again and build new
house )Latest strategy is to sell a unit that I have stripped the depreciation out of, pay profit off home loan an then borrow back immediately for deposit on new property. Refinance home loan over 25 yrs down to new loan value thereby increasing serviceability at the same time. Will let you know how it goes. Once house paid off would probably use cash to pay deposits on houses for better CG.

 

[Tibor]

Hi Sutts,

"I can only show you the door, but you have to walk through it"
Matrix.

Basically you have to do your own reasearch as I do not know what area are you in, what is your strategy, risk tolerance, etc, etc, etc.

I can share info with you.

RESIDEX reports. There is a great variety of them and they are reasonably priced. Choose which is suited to you rrequirements and use it. www.residex.com.au is the web site.

Australian Property Investor magazine. Worth to subscribe (10% off cover price) full of useful info.

Herron Todd White www.htw.com.au and get their reports. Also very useful.

in qld use www.rta.qld.gov.au which gives you info about last quarterly bond lodgements and median rents

State and Local government web sites and stats. Some free, for other you will have to pay

various web sites www.realestate.com.au www.ljhooker.com.au www.domain.com.au and have a look at prices and rentals

ANY other sources of information you can get hold of and reklated to the area you are interested in.

Hope it helps,


Tibor