Home Issues - Sue's "Cordial Mix" theory

[WebBoard]

From: Mike .


Time to move...Any suggestions
From: Don
Date: 6/5/00
Time: 8:06:17 AM

Hi group, I don't post a lot, but I read everything. Thanks for all the great info & discussion.

We have our own house and 1 IP, both highly geared. I changed jobs 5 months ago and now work on the other side of Sydney to where we live. We'd like to move closer to my work, but couldn't afford a house in the area. However we can afford to rent a small flat.

Rental wouldn’t cover costs if we hold our own house, as the interest is not tax deductible, so it would cost an extra $100/week to keep it. I don’t want to sell it, but believe that we will have to, and buy another IP somewhere.

Does anyone know any ways around this – ie basically making the interest payments on out house deductible.

Your help would be much appreciated

Don

 

[WebBoard]

Debbie

Reply: 1
From: Mike .


Re: Time to move...Any suggestions
From: Debbie
Date: 6/6/00
Time: 1:39:06 PM

I just gave my bank manager friend a call - she tells me it should just be a simple matter of switching your loan product from P&I to IO Investment loan. Your repayments will be lower and totally tax deductible. Hope this helps. Good luck with the new job.

cheers, Debbie

 

[WebBoard]

Anon

Reply: 1.1
From: Mike .


Re: Time to move...Any suggestions
From: Anon
Date: 6/5/00
Time: 7:34:16 PM

The easiest way is to rent your house out! That way, you get the rent and the deductions, and hopefully can cover your own renting expenses. Note that your bank may want to change your interest rate.

 

[WebBoard]

Terry A

Reply: 1.1.1
From: Mike .


Re: Time to move...Any suggestions
From: Terry A
Date: 6/5/00
Time: 9:55:27 PM

Don I am a little confused about what you want to do. If you rent out your house then the interest is deductible. If you want to live in rented accommodation near work and in your own home on weekends then there is no way around it.

Remember you can rent your own home for up to six years and retain the capital gains tax exemption on your primary residence.

Hope this helps

 

[WebBoard]

Terry A

Reply: 1.1.1.1
From: Mike .


Re: Time to move...Any suggestions - Correction to my earlier post
From: Terry A
Date: 6/10/00
Time: 11:02:13 AM


Sorry about this but you cannot claim the interest on own home. However, if your employer requires you to move as a condition of your employment, then it is claimable.

I based my previous comment on my own experience as I am in the Army and subject to the whim of the service so I am able to claim the interest and depreciation. Once again sorry for the misleading comment.

 

[WebBoard]

Jane P

Reply: 1.1.1.1.1
From: Mike .


Re: Time to move...Any suggestions - Correction to my earlier...
From: Jane P
Date: 6/10/00
Time: 4:28:49 PM

Hi Terry A Where are you based? We're also in the Army and as a result move around. We've left two houses in Melb and hope to purchase 3, 4, 5, etc soon as we've evaluated finance and properties.

I'd be interested in hearing how many properties you have and how you came about purchasing them.

Cheers Jane P

 

[WebBoard]

Terry A

Reply: 1.1.1.1.1.1
From: Mike .


Re: Time to move...Any suggestions - Correction to my earlier...
From: Terry A
Date: 6/12/00
Time: 11:37:58 PM

Jane, I am currently posted to Thailand (my third overseas posting). We own three IPs and we paid off our own home last year. We got into IPs when posted to PNG and we bought "off the plan" a DHA leased property.

When we inspected the property rain had held up construction so we admired the slab sitting there. The next time we inspected it was a year later while driving from Townsville to Melbourne for our next posting.

I have read comments about DHA houses being overpriced and we certainly paid too much as we have made a capital loss however it has been cash flow positive for a number of years now and from what I hear in the news SE QLD may start to move now.

Our second property was also leased by DHA but was a private sale. It was cash flow positive from day one (learnt some lessons from the first one) and recently the house next door which is very similar sold for $25K more than I paid for mine two years ago.

The third one was bought direct from DHA on a yield of 7% and rent $250 pw. After 12 months it increased to $300 pw and has remained there. Also it has shown a capital gain of about $50K in two years.

Currently we are looking at another private sale of a DHA leased house at a yield of about 7.8%.

Why DHA? We like the security of the long lease especially whilst being posted all over the place. The security of sleeping at night knowing there will be no vacancies, no hassles and continuous flow of rent is very comforting.

I wouldn't buy another direct from DHA for some of the reasons in this forum, overpriced property mainly. But I have learnt a lot in the last nine years since I bought the first one. Only one has a lease of agent's fee 15%, the others are at 5% and when they expire I will go to the private market as my calculations show they will be even more cash flow positive.

This has become longer than I intended but once you start me on my favourite topic it is hard to stop.

Cheers to everyone.

 

[WebBoard]

Frode

Reply: 2
From: Mike .


Re: Time to move...Any suggestions
From: Frode
Date: 6/6/00
Time: 9:37:07 AM

First: seek professional advice!

I have a feeling that the taxman won't allow you to suddenly start deducting the interest on a house which was bought for the purpose of being your primary residence. Check with your accountant before you do anything!

- Frode

 

[WebBoard]

Don

Reply: 2.1
From: Mike .


Re: Time to move...Any suggestions
From: Don
Date: 6/6/00
Time: 12:52:23 PM

Thanks for your comments.

My understanding is that if you buy a house as your own primary residence (ie. the purpose of the loan is not for investment) you cannot deduct the interest payments as an expense when you later rent it out, however you can claim depreciation, rates etc.

If I cannot deduct the interest, then I am still significantly out of pocket.

Regards, Don

 

[WebBoard]

Mick

Reply: 2.1.1
From: Mike .


Re: Time to move...Any suggestions
From: Mick
Date: 6/6/00
Time: 2:32:43 PM

Don, if you rent your own property out, you can claim all the interest as a tax deduction. You can still do this and then make an order to the tax department (I can't recall the rule no.) stating that the residence is now your primary home once again. You have a six year period to do this during which you will not be held liable for capital gains.

After 6 years, if you haven't declared the premises as your primary residence again, you'll be liable for capital gains - just what portion will be up to your accountant and the taxman to figure out.

I rent my primary residence and make full claim as a income producing investment. I intend moving back in in several years. You can reap the benefits but only for a specific time frame and subject to appropriate applications.

Your accountant will know all this and I recall it being in Jan's book.

 

[WebBoard]

Les

Reply: 2.1.1.1
From: Mike .


A bit of deja vu here ... !!!
From: Les
Date: 6/6/00
Time: 7:43:36 PM
Remote Name: 205.180.243.65

Don,

Mick said it - I tried to reply on Sunday to point out an earlier forum entry entered by Sue on 12/11/99 titled "Claim Previous Home Interest". But my PC died in midstream ... :^(

In a nutshell, Sue questioned my advice to others regarding just this scenario - I had been quoting many others (Jan Somers, Noel Whittaker, etc.) and remember many others all saying "Sell your home, then buy a rental - don't transform your current home into a rental". Possibly you and others have also heard such advice.

Anyway, seek out that entry and check out the answers - it taught me a lot - and Sue was dead right - you CAN claim the interest on your original from the day it becomes rental. But DO check it out with your favourite accountant to make it happen the right way. My final entry "A blinding flash of the obvious" probably describes why so many others were saying "Sell your home - don't make it into a rental". Hope it helps,

Regards, Les

 

[WebBoard]

Don

Reply: 2.1.1.1.1
From: Mike .


Re: A bit of deja vu here ... !!!
From: Don
Date: 6/8/00
Time: 8:19:22 AM

Thanks for setting this straight. I went back to your previous thread and checked it all with the ATO.

Fantastic - no agents, solicitors, waiting for a sale. I appreciate your help here very much, as I had been relying on all the old advice - ie. sell your own house and buy a rental.

Don

 

[WebBoard]

Les

Reply: 2.1.1.1.1.1
From: Mike .


The "Blinding Flash of the Obvious" revisited
From: Les
Date: 6/8/00
Time: 9:42:32 PM

G'day Don,

Glad it helped. What always amazes me is how misinformation can duplicate itself, and I had heard that same misinformation for the last 15 years or so, and I helped to replicate it too. It is NOT wrong, but it makes assumptions that were never (in my hearing) spelled out - that assumption being that there would be minimal mortgage to pay on your original old home. And, in hindsight, (naturally with 20/20 vision), it is easy to see how this can happen - I've heard the average Aussie stays in a home for only 7 years. Over that time, the house price doubles (10% per annum) and the mortgage stays the same, or reduces a few paltry thousand (normal P & I ;^) - so when the time comes to move on, you owe (e.g.) around $75k on a $200k home. And, in making this a rental, only THAT 75k is Tax deductible (if you borrowed more to purchase a new home, sorry !!! It doesn't count!!).

So, you receive $220 per week rent, (11k per year), and pay $5k of mortgage. Add a bit of RE fees, Insurance, etc, and subtract depreciation, etc. and you are BOUND to be Cashflow positive....

So, guess what?? You pay Tax on the PROFIT at Marginal Rate (48.5%???). And THAT is what all of those venerable people were saying when they suggested "Sell your home, and buy another as a rental". The only problem was, those words led me to assumptions that were incorrect.

And, of course, if YOUR situation is different (i.e. you owe HEAPS on the home, instead of around 40%) then the advice, if taken at face value, would cost you heaps !!!!

I am SO glad that Sue questioned my earlier advice - it served us all well, as it confronted those assumptions head-on, for the good of all.

Onya Sue(1), Les

 

[WebBoard]

Sue1

Reply: 2.1.1.1.1.1.1
From: Mike .


Re: The "Blinding Flash of the Obvious" revisited
From: Sue1
Date: 6/12/00
Time: 12:53:35 PM

Hi Les, I've come in on this one a bit late but anyway... We do only have a tiny mortgage on our own original home which we now rent out and sure we have a positive cash flow but... things are not as bad as they seem... our tax rate is only 20% - 33% (soon to be 17% - 30% thanks to the GST), and we are able to claim the highest rate of building depreciation - 4% because our house was built in the right time frame, and because our other properties are negatively geared the overall "cordial mix" (see Story by Story - Jan Somers) is still OK ie. some neg gear, some positive gear brings overall back to neutral and minimal tax.

We would be crazy to sell a great house with great long term tenants in a great area with a 4% dep rate and put about $10,000 in others peoples pockets to do it ie selling exp's, buying of replacement prop exp's etc just for the sake of a positive cash flow.

So what I am saying is that every situation has to be worked out on its own merits and just because you have a low mortgage on your home when you decide to rent it out doesn't mean its necessarily a bad idea. It's the overall "mix" that counts.

Thanks for the positive comments Les. I only get on to the forum about once a week but get such a kick out of the posts.

cheers, Sue

 

[WebBoard]

Les

Reply: 2.1.1.1.1.1.1.1
From: Mike .


That "cordial mix" is a great lesson too!!
From: Les
Date: 6/14/00
Time: 5:21:44 PM

G'day Sue1,

Long time, no speak. Good to see you pop up now and then, Sue1.

You are doing what I have been thinking of doing - i.e. "diversifying within property" - which really is that "cordial mix" story again. It's a great point, and sounds like it's working well for you.

Keep on truckin', Sue1 - see you at the top!!!

Regards, Les