Investment property and Tax

[abhyans]

My partner and I currently have 2 properties jointly. One is owner occupied and one is investment property both have mortgages. However the value of both properties is far greater than the mortgage value so we have equity in both houses. I am the in higher income earner than my partner

The investment property is currently positively geared. I was looking at ways in which to make the investment property negative geared or NIL gearing

The decision has to make sence investment wise and ethical tax wise
For example if I sell the investment property pay off my home mortgage and buy a new one with maximum loan then I spend money in Dealer fees, Stamp duty, Capital Gains tax etc so I dont want to sell it

We were tossing on couple of options.
1. My partner will sell half is share of investment property to me and i will pay the money which we can put in our own home
2. Take Investment loan for max equity on IP and buy blue chip shares but what happens if I sell the shares and put the money in my home loan and not IP Loan
3. Take a loan to Knock down the current IP and build a duplex (I can build a duplex there). So I am taking more loan and adding value in the IP

I would like to ask for some guidance on this from good Tax and Investment Adviser. I am ready to pay the Advice fee so if you could give me referral then that would be fine too

 

[HotRod]

So you want to lose money????

I don't get it.

You are currently in a position where a property will be putting money in your pocket for you to spend any way you want but you don't want it???

I'll PM you with my bank account details shortly.

 

[alexlee]

ethical tax wise

Define this for me.

 

[Terry_w]

My partner and I currently have 2 properties jointly. One is owner occupied and one is investment property both have mortgages. However the value of both properties is far greater than the mortgage value so we have equity in both houses. I am the in higher income earner than my partner

The investment property is currently positively geared. I was looking at ways in which to make the investment property negative geared or NIL gearing

The decision has to make sence investment wise and ethical tax wise
For example if I sell the investment property pay off my home mortgage and buy a new one with maximum loan then I spend money in Dealer fees, Stamp duty, Capital Gains tax etc so I dont want to sell it

We were tossing on couple of options.
1. My partner will sell half is share of investment property to me and i will pay the money which we can put in our own home
2. Take Investment loan for max equity on IP and buy blue chip shares but what happens if I sell the shares and put the money in my home loan and not IP Loan
3. Take a loan to Knock down the current IP and build a duplex (I can build a duplex there). So I am taking more loan and adding value in the IP

I would like to ask for some guidance on this from good Tax and Investment Adviser. I am ready to pay the Advice fee so if you could give me referral then that would be fine too

1 could work if done properly but stamp duty (most states) and CGT on the transfer.
2. If you sell the shares you will no longer be able to claim the interest
3. You cannot claim interest on the portion you are living in.

 

[abhyans]

As I said currently I have owner occupied house which has mortgage so that is money we cant claim.
The idea was to use the full equity for IP to invest and make money which we can use to pay off our existing loan.
You have to spend money to make money. I am not loosing anything. It is just good investment stratergy. Why should I give money to tax office when I dont have to.

 

[Terry_w]

Well, you just borrow to invest and get a return higher than what you pay in interest and use this to pay down the non deductilble debt.

At the same time you maximise tax deductions

 

[abhyans]

More questions

Thanks Tony, After some sarcastic remark i got before you were really helpfull.
I just need clarifications

So can i do something like this
1. Refinance the loan to maximum equity to buy blue Shares.
2. If the shares are sold then the money has to go back for IP and not my home loan. I can use the money from selling of shares for anything on IP.

Can I use that money to get DA on the IP for duplex.
Or if I decide to build it build duplex then sell the shares in stages as and when needed etc.
3. The return of shares can be used to pay of my owner occupied loan
This would more of 5 year plan if I do decide to build

 

[HotRod]

As I said currently I have owner occupied house which has mortgage so that is money we cant claim.
The idea was to use the full equity for IP to invest and make money which we can use to pay off our existing loan.
You have to spend money to make money. I am not loosing anything. It is just good investment stratergy. Why should I give money to tax office when I dont have to.

And you end up beating the tax-man. Yay.

But here's a rule I use to assess investments:

If you end up paying more tax you are generally making more money.

If you end up paying less tax you are generally* making less money.

*(ignoring depreciation etc)

Reminds me of people you overhear refusing to work over-time to earn more money because they will have to pay more tax. I just don't get it.

 

[abhyans]

And you end up beating the tax-man. Yay.

But here's a rule I use to assess investments:

If you end up paying more tax you are generally making more money.

If you end up paying less tax you are generally* making less money.

*(ignoring depreciation etc)

Reminds me of people you overhear refusing to work over-time to earn more money because they will have to pay more tax. I just don't get it.

Well did you know some of the Richest people in Australia and World do not pay Single Cent of Tax so your theory does not work mate

I will pay tax for what i own. But I will try to get out of paying tax as much I can legally and ethically.

 

[HotRod]

Well did you know some of the Richest people in Australia and World do not pay Single Cent of Tax so your theory does not work mate

I will pay tax for what i own. But I will try to get out of paying tax as much I can legally and ethically.

I know. I just want to make sure you know the difference too given it was your first post and all.

Some would-be property investors have twisted ideas on what property investing is all about.

The biggest one I have heard from friends is that they have to beat the tax-man to win. If they can buy a property and NG all the way up the wazoo and pay no tax they are a winner. After I explain that they are getting 40c back on every dollar they take out of their pocket they have a light-bulb moment.

You look like you know what you want to do, which is good.

 

[abhyans]

I know. I just want to make sure you know the difference too given it was your first post and all.

Some would-be property investors have twisted ideas on what property investing is all about.

The biggest one I have heard from friends is that they have to beat the tax-man to win. If they can buy a property and NG all the way up the wazoo and pay no tax they are a winner. After I explain that they are getting 40c back on every dollar they take out of their pocket they have a light-bulb moment.

You look like you know what you want to do, which is good.

Hi

Yes I know what I am talking about. Before making any investment decision I will have to make sure that it is sound investment stratergy.

One advice we got was sell the current property and buy a new one. Which makes sence tax wise but does not make sence investment wise. The current IP is sound investment and giving us good returns that is why it is positively geared. If I sell it and buy a new one that means I am paying money to Real Estate agent to sell it, paying stamp duty to government, paying CGT etc.

But I knock down current home and build a duplex then although I am spending money here I am adding value in the property. We calculated that by spending $500K to $600K the value would go up by $1M. Plus I get two rental income in area where there is rental shortage and give rental yields. even after we build a duplex it would end up being positively geared or NIL geared.

If I buy blue chip shares and use that return to pay my home loan then I am getting Income on shares which is taxed at company tax rate already and I get franking credits. Assuming the return is more than interest we are paying it would be sound investment as well. As Terry said earlier I can use return of share to pay of the my home loan which gives me tax benifit.

I have small share portfolio . I understand the process as I work in Finance Industry. And I know as long as I dont want to sell the shares then even if the share value drops it is allright as long as it is giving me good return.

I am not much of share investor and I will get nervous if share prices fall.
I know property prices may fall as well. Or government would decide to cancel the negative gearing which is another risk.

But property is still asset and if I cant sell it, I can rent it out or live in it or let my kids live in it. I cant do that with shares and if shares go down too much or company goes under then those shares are worthless

 

[Banawarra]

How much equity do you have in your PPOR and investment property?
If there is equity available why not use it to buy another IP or shares without having to sell your cf+ property?

 

[Terry_w]

What state is the investment property in? If VIC you may be able to sell to spouse at market value with nominal stamp duty.

 

[abhyans]

Property details

Hi

I have plenty of equity in both the property
Both prop are NSW

 

[wylie]

How much equity do you have in your PPOR and investment property?
If there is equity available why not use it to buy another IP or shares without having to sell your cf+ property?

This was my first thought too. Several years ago we had about $100K left on our housing loan. I did the numbers on selling one IP in order to clear our housing loan and be debt free and then buy another IP so all our debt was "good debt".

Our broker helped me to see this was not the right way to move forward. The selling costs and buy in costs for a new IP outweighed the gain in the tiny amount of annual interest we could not claim on our PPOR.

I should add that we would not have contemplated selling an IP for the sole purpose of clearing the $100K housing loan, but that there were other things we could have done (i.e.. develop townhouses on another block).

So, depending on how much you owe on your housing loan (that is not claimable), I would look at just pouring all your spare funds into the loan to get it down, and concentrate on whatever is next on your radar, knock down and build duplexes. But do it because it moves you forward and not for the purpose of saving tax. How much loan do you have left on the PPOR?

 

[Terry_w]

Yes, I agree.

Do the figures. Work out CGT, agent fees, stamp duty on the new purchase etc

Then work out how much extra interest you will be savng each year as you pay down the PPOR debt and how much tax saving with the new investment purchase.

Then see how many years it will take you to recoup the sale cost and make an assessment.

It is not all financial, other things to consider:
restructuring for greater assest protection
estate planning for death or either party
getting a better performing asset
saving land tax by buying differently
etc

 

[abhyans]

Loan and equity on property

Property prices have increased quite a bit in our area since we bought both properties.
Our IP which used to be our home was bought pre GST 2000
Our home which was our original IP was bought on 2005
We used equity on our home as collateral and withdrew extra repayments we made to make 20% deposit

When we bought it as IP it was old home but was already rented
In 2010 we knocked down the old IP house and built bigger house
We had to take extra for building but since we built the value of house has increased. would say the loan amount on both properties is half of value

The interest amount on both loans is quite manageable and we do extra repayments as well as keep money in offset account. We are certainly not struggling with repayments. We even manage to go on regular outing and domestic and international holiday

Both of have good stable employment and have issues with paying extra tax because of bracket creep

I have small share portfolio, salary sacrifice in super, buy my company share under employee share purchase plan. Put money in youth account for my kids

But it would be good if I can reduce my current home loan further as it is bad debt and decrease my IP income

 

[D.T.]

Use the equity to buy more properties instead

 

[Paul@PFI]

Hi

If I buy blue chip shares and use that return to pay my home loan then I am getting Income on shares which is taxed at company tax rate already and I get franking credits. Assuming the return is more than interest we are paying it would be sound investment as well.

This sounds like a good idea but it comes with a LOT of conditions.
1. Blue Chips that pay high dividends. If they dont pay divs then gearing fails. (You CANT claim interest).
2. Blue Chips that have stable capital value (whatever that means). remember the shares can lose value nullifying all the income. You may see the income benefits against the loan and decide to hold - while they fall and fall etc.
3. The grossed up div yield must be substanially higher than the loan interest. For example CBA yield is as high as 9% v's a loan at 5%. BUT...Not all loans are 5%. The loan value will be stable while share price may fall. Loss of equity. Remember too that the 12% tax shortfall reduces yield. So the 9% is more like 8.23%
4. Have you calculated the franking tax shortfall ?? Works this way....You receive $1000FF. It is taxed as $1420. At your marginal rate (say 38%).. tax is $540 less franking $420 = $120 shortfall per $1,000 FF div received. Thuis rises with taxable income...The 38% rate applies up to $180k. Its a crude estimate but should be close.
5. Interest rates may rise. (?)
6. If shares fall 20% what happens ?? You end up with a loan and no equity ? What is your tolerance to risk ? With IP its longer term. With shares it hourly, daily and its an imediate impact. Some margin facilities force sales too.
6. Do you have expertise to pick shares then decide when to exit, hold etc.
7. CGT applies to the share increased value too. I suspect you may be seeking capital stability. The gain may be fully taxed. beware long term holds chasing the 50% discount. Murphy's rule of CGT adresses that. (Murphy reckons if you hold a few more weeks to get the 50% CGT discount the price WILL fall) What shares are more stable and which are less stable ?

It may be worth drawing all the options and their relative merits and potential taxes etc. Thats financial advice. So you probably need to discuss all options with a person who is solid with tax, property and finance AND direct shares. Thats not typical in the financial planning industry. It is something we can assist with.

 

[tobe]

Keep both properties. borrow to buy a third property. enjoy investment and tax deductions. As the rent inproves and or your tax position deteriorates, repeat.

note, you can insert shares or any other investment in 'third property' above.