First IP, then expanding family

[gazerooni]

Hi all, first time posting but long time reader.

We are just about to bite the bullet and purchase our first IP. In 12 months time we hope to have another child then my wife will stop working for a few years. The plan is to buy a couple of slightly negative geared (or even positive if we find a decent one) before my wife goes on maternity leave (after which the banks will look less favourably on us for loans..).

The question is, should we purchase the IPs in my name only as it will help reduce tax. But if so, can my wife be on the loan even if her name is not on the title for the IP?

Sorry if this is a silly question, still on a steep learning curve..

 

[Marty McDonald]

You should consider if your plan is for her to return to work or not and how long you plan to hold the properties. Also tax laws may change. As it stands at the moment if she is not earning income it makes sense to have the properties and loans just in your name that way there is no conjecture as to you claiming all deductions. Down the track though cgt liability would be reduced if jointly owned and you sell once retired.

Who knows what the rules will be in the future although you would think politically any changes would not be retrospective.

A good each way bet maybe to have as an 80/20 ownership structure or similar....it really depends on your wifes future work plans and your holding intention. Although both at the end of the day will probably not be nearly as important as your property selection decisions.

 

[gazerooni]

Thanks Marty, my wife will probably be out of work for 4-5 years after our next child, and her income will be less than mine when she returns.

If we go went 80/20 I assume we will need to get her name on the title? and the 80/20 you refer to is just what we calculate at tax time?

If say we do get both names on the title and my wife stops working, is my tax claim only going to be the portion we worked out above?

We are planning to buy and hold so it will eventually be positive geared, so if my wife is not working, or is earning less than me then maybe it would be better for her to be 80 and me 20!?!

You can see why my head is spinning!!

 

[BuildingBlocks]

By the time she is back at work the properties will most likely be neutral or positive, if you are buying only slightly negative to start with. Something to think about.

Is the issue that you may not be able to get finance if it is just your serviceability taken into account?

 

[wylie]

We have never held more than three IPs and always in my husband's name. (Although now my brother and I manage our parents' IPs too.)

We have sold a few and bought a few and over the years as our income and rent rose, and we would buy again, putting us back into negative territory.

So, over 25 years of marriage we have either been negatively geared with the tax breaks that brings, or positively geared and missing the tax breaks. We always wanted IPs to ensure we had a nice retirement cushion, but still have never felt we missed out on having a reasonably comfortable existence (except the early years which were really tough with no spare money - our choice to buy IPs). Even when we were skimping, I always felt happy that we could sell the IP and make out situation much better, though we never chose to do that.

When we first were married I earned slightly more than hubby but once the children came along, and though I worked between the first two, I stopped working after baby number two, so all the interest was still able to be claimed against hubby's income.

The way I saw it, had I ever wanted to go back to work, I could have bought the next IP in my name if I wanted to balance out the tax situation and if I needed or wanted some interest of my own to offset against a possible future salary.

Turns out after the hectic very young baby years, I loved being at home and now, at age 50, I have taken a casual job for the social interaction.

Of course, we never looked on IPs as our main driver, and my choice to stay home with our kids was very personal. Had we wanted to build a larger portfolio, I would have had to return to work full time to do so, and in my opinion, until a woman (or man) stays at home it is difficult to plan on whether he/she wants to do it long term or is keen on getting back to the full time job (easier than having three littles at home, in my opinion - and that of my husband ).

 

[wobbycarly]

Exactly why trusts can be of benefit; you can change the distributions as your circumstances change. Not that I'm advocating a trust (we don't have one), but it might be worth investigating.

It's such a difficult question, IMO - generally, one wants the property to be in the higher-income earner in early days, then change the ownership over time to the lower-income earner, say as the property becomes positive, or selling time.

 

[sashatheman]

Hi gazerooni

My wife and I are in a similar situation. we want to have kids in the near future, but we both also want to get into the property market.

Can I ask you a couple of personal questions.
How much would your income be when your wife goes on maternity leave?
Do you factor in the maternity leave money paid by employer/government as well?
How big is your mortgage currently?
does your wife plan to work a couple of days a week eventually?

You don't have to answer it, but I am very interested to see how you are planning for it to give me more info.

 

[Marty McDonald]

Thanks Marty, my wife will probably be out of work for 4-5 years after our next child, and her income will be less than mine when she returns.

If we go went 80/20 I assume we will need to get her name on the title? and the 80/20 you refer to is just what we calculate at tax time?

If say we do get both names on the title and my wife stops working, is my tax claim only going to be the portion we worked out above?

We are planning to buy and hold so it will eventually be positive geared, so if my wife is not working, or is earning less than me then maybe it would be better for her to be 80 and me 20!?!

You can see why my head is spinning!!

I know its not easy to know how things will unfold! 80/20 refers to tennants in common with both of you on title but owning 80% and 20% of the property respectively. So 80% of deductions against 80% of income etc.

A trust can get around some of the issues you mentioned but for most people its just not worth the hassle and expense. Also tax losses in a familty trust are held within the trust and therefore can only offset against future positive income ie you cant negative gear with a family trust in the traditional sense. On that basis my gut feel says you should buy 80/20 with your share as 80% as it may be best to maximise deductions now at the start of your journey while still having your wife on title so that you can easily access equity in the future based on both incomes. This will make things easier loan wise down the track....These are just my initial thoughts, you should get some accounting advice as well.

Good luck!

 

[gazerooni]

Thanks so much to everyone for your comments, they have been a huge help. My reasoning for the question was to make sure we maximise our tax effectiveness for this property but I probably submitted this question without looking at the big picture - the plan is to keep buying and holding over the years so we will most likely have negative and positively geared properties which will even things out..

I will investigate trusts, but as some have mentioned (and what I've also read) they can be a bit of a burden and we just want to keep it simple at this stage.

Finance shouldn't be an issue but obviously combined incomes would look good to the banks (currently earning around $75k combined, this will drop about $10k when wife goes on maternity leave) and we are sitting on around $340k with our current PPOR with a $200k loan.

sashatheman - the plan is for my wife to go back to work when the kids are back at school so we are looking at a single income for probably 7-8 years (she might do some part time work), but as wylie said circumstances may change and she may not want to return to work anyway. One thing I might suggest sashatheman is to try and buy an IP (or a few) before you start a family if you want to maximise your access to finance, just having our first child has knocked about $50k off the maximum loan we could get...