Keep or sell?

I have a friend who owns a unit on the lower north shore. It used to be her PPR until she upgraded to a larger unit. The original unit is paid off and is now an investment property. Her accountant has told her to sell the unit and use the proceeds to pay down non deductible debt on her current PPR and then buy a new property or two that she can negative gear.

As she rented out the original unit for a few months prior to moving in, she can't use the 6 year rule and sell it CGT-free.

She has no intention to purchase any more IPs in the near future but wonders whether she should buy/sell based on her accountant's advice.

Should she sell the unit because she can't claim any gearing, or do you reckon it's a good position to be in and tell her to continue as is?
 
It's making money - that is not the worst problem in the world. She should look to minimise her income in other ways eg. depreciation, salary sacrifice super, donations etc.
 
That only considers the income tax side. There is much more to consider besides this.

Just focusing on the tax aspects for the moment she should just work out the figures. Sale may cost her $X but it would save her $Y per year in interest. But to buy a replacement property would cost another $Z but this could save her $A per year in tax.
 
It all depends on the value of the unit and how many years she liveed in it..as the CGT will be pro-rata. Also bear in mind there will be a correction soon...so the value will be less at some point...now is an excellent time to sell. Some numbers to ponder.....

Lets say she bought the the unit for 380k.....paid 20k buying costs. and selling costs are 100k..and lived in say 5 out of the 10 years she held it. Lets assume the unit is now worth 600k.

So the CGT will be 190k. Less 50% CG deduction as she held the property for over 1 year. The CG (Capital Gain) is 95k....as she lived in it for 5 out of 10 years....she only needs to pay 5/10ths for the 100k ...so the capital gain is 45k.

Assuming she is on say 80k per annum. She will pay about 40% tax or 18k. If she sells say in say April/May next year she will also get a pro-rate of depreciation and any expense so the tax rate will be even less.

If she holds on say for another 2 years and sells in a bad market and the property drops 50k....then the net profit may not be 180k odd....but more like 125k.
 
Why can't she re-mortgage her IP and use the equity to buy another investment property? that can avoid the CGT and she can use the re-mortgage interest to offset any gains if she is looking for NG, at the same time she has the benefit of CG on both IPs. wouldn't that problem solved?
 
Simply to sell a unit and buy another unit for tax deduction reasons isn't the best move.

Firstly, what are the agent fees to sell the unit
Secondly what will the stamp duty be to purchase another property.
 
Why can't she re-mortgage her IP and use the equity to buy another investment property? that can avoid the CGT and she can use the re-mortgage interest to offset any gains if she is looking for NG, at the same time she has the benefit of CG on both IPs. wouldn't that problem solved?

Because of this. I can understand that thinking.

I have a friend who owns a unit on the lower north shore. It used to be her PPR until she upgraded to a larger unit. The original unit is paid off and is now an investment property. Her accountant has told her to sell the unit and use the proceeds to pay down non deductible debt on her current PPR and then buy a new property or two that she can negative gear.
*snip*
 
Simply to sell a unit and buy another unit for tax deduction reasons isn't the best move.

Firstly, what are the agent fees to sell the unit
Secondly what will the stamp duty be to purchase another property.

You generally would lose around 10% - 5% each way.

But this doesn't necessarily mean it is a bad move. You just have to do the calculations and work out how long it would take to save this in tax and then make a decision on whether it is worthwhile or not.
 
I have recently downsized and upgraded, so there is some non deductible debt on the PPOR. I have just listed two properties for sale in Sydney which will give me cash after their Ip loans are paid off, to pay off the non deductible debt. I will then use borrowed funds to reinvest.

Reasons I have done this is I don't like non deductible debt, the properties have grown in Sydney. One property was positive cash flow, the other neutral. They will be 5% return to the new owner. I still have other properties in the Sydney market and elsewhere. I am happy to take a profit, pay the CGT and restructure.

depending on the size of the debt, perhaps your friend may want to sell her old home. In each case it's a personal decision, it took me a few months to decide to sell, basically I know I can replicate what I have done and repurchase in growth areas
 
Ignoring any CGT implications, and assuming

1. a 5% interest rate on a fully borrowed property worth $800k,
2. a sale price of $800k on the old place and
3. a 48% marginal tax rate,

it would take around 4 years to make enough cash through the tax deductibility on the interest to recoup the amount lost through selling costs and stamp duty and around 7 years if the marginal rate was 30%.
 
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