My dream home is not my dream home anymore

[Marina]

Hi everyone,

We sold our small PPOR and built our dream home and parked all the funds into this home . This dream home was an IP for the first year.
It is just in my husbands name.

Just recently we came to the conclusion we would be happier living in a single story home ( doubles are so hard to live in).

We do not have any money for a new home as all our money is in this house. If we were to redraw then that money would not be tax deductible.
We made a huge mistake.

We are definitely not selling it as it a great rental in a strong growth area.

Has anyone got any ideas on what we can do from here on in.

The property is worth 600K and the mortgage is $260K. It is now being rented out for $450 per week, but we have no place to call home.

Do we just keep renting a single story home.

Thanks in advance

 

[Bandita]

Hi Marina,

Have you considered setting up a trust and selling the property to it? You would have to pay stamp duty - but not CGT.

Cheers,
Jen

 

[Marina]

Dear Jen,

I cannot understand the concept of a trust. Are you able to explain in laymans terms.

If my loan is 260K and I sell to a trust for 550K then I would have $290k to buy another house.

Would I then be able to claim the negative gearing on this property.
Loan would be $550k and rent is 450p.w

can i claim the loss against our taxable income.

Maybe this is the solution I have been looking for.

Can you recommend a good accountant or someone that can set this structure up for me.

ever so grateful for any further info.

kindest regards
marina

 

[Les]

G'day Marina,

Can you recommend a good accountant or someone that can set this structure up for me.

Send a PM to DaleGG or contact Gatherum-Goss - they are in Melbourne's Eastern suburbs (way out, as I understand it )

Try www.gatherumgoss.com - or chuck an au on the end if that didn't work.
Dale has authored a book called "Trust Magic" and it is WELL WORTH a read. He set up my HDT (not for the same purpose as you, but shouldn't matter - he KNOWS these things backwards),

A big G'day to Peter too (hope I've got the name right - it's been awhile )

Regards,

 

[tigerGT]

What are the costs involved with setting up a trust? Is this question the same as asking , "how long is a piece of string?"
Reason I ask is because I am going to start reading around and finding out more but just want an idea of how much they would cost to set up?
Thanks
G

 

[Bandita]

Send a PM to DaleGG or contact Gatherum-Goss - they are in Melbourne's Eastern suburbs (way out, as I understand it )

Try www.gatherumgoss.com - or chuck an au on the end if that didn't work.
Dale has authored a book called "Trust Magic" and it is WELL WORTH a read. He set up my HDT (not for the same purpose as you, but shouldn't matter - he KNOWS these things backwards),

Exactly what I was going to say! And Dale communicates great through email, so you don't have to make the long trip out there

Cheers,
Jen

 

[tigerGT]

anything for sydney somersoftarians?

 

[Les]

G'day Tiger,

anything for sydney somersoftarians?

Yeah, check out NickM on this forum, or go to www.strategicwealth.com.au

And I'm sure there are others too - keep an eye on the signatures of people in this forum

Regards,

 

[The Y-man]

Marina,

I understand hhe property could also be sold to yourself from your Hubby, and then you could take out the loan to make it an IP (with all deductions etc). However, this would presume you have a taxable income that would make this exercise worthwhile.

Cheers,

The Y-man

 

[GreatPig]

I sell to a trust for 550K

Why would you sell it to the trust for $550K if it's worth $600K? Was that what you originally paid for the house?

I think you would need to sell at current market value, particularly for stamp duty calculations. That would mean more stamp duty, but also that you'd have more money in your own name to buy your next house.

The first question is can you actually borrow enough more to cover the cost of another single-storey house? That would mean a loan of $260K plus the value of the new house (including the stamp duties & other costs). You need to consider serviceability as well as equity.

If so, then I think the procedure would be:

- Highest income earner borrows the value of the new house plus costs in own name. Either or both houses could be used as security.

- If the current $260K loan is not already in the highest income earner's name, then change it to make it so.

- With the loan money, buy special income units in a hybrid trust.

- Sell the double-storey house to the trust for $600K (assuming that's its current market value).

- From the sale, take just enough of the cash to buy the new single-storey house outright, with no mortgage.

- The remaining cash (assuming the new house is less than $600K) would stay in the trust as a personal interest-free loan from you. In reality there would be no extra cash, as the only cash injected into the trust would be from the new loan which would just be the value of the new house, so this personal loan would just be a book entry. Alternatively it could be permanently gifted to the trust.

- At the end of each financial year, distribute net profits from the IP. If your trust deed is drawn up accordingly, you should technically be able to just distribute the percentage of profits attributable to the bank loans back to the unit holder and the percentage attributable to the personal loan discretionally, but if the latter percentage is relatively small, it may be easier to just distribute it all to the unit holder.

- The unit holder would then include the distribution in his/her income and claim a deduction for the loan interest.

In reality, if the new house and loan is more than $340K you may not be able to put it all against the IP, as you may not be able to have a loan for more than $600K against a $600K house. You'd need to check with your accountant about that. If not, then some of it would have to be against the new house, in which case that component of interest would not be deductible.

In a nutshell, a hybrid trust used this way is essentially the same as a unit trust. Someone borrows money to buy units in the trust and the trust uses those funds to purchase assets. Income from the assets then get distributed back to the unit holder. As the loan is for income-producing purposes, the interest is deductible but the distribution also counts as income.

This is just my understanding of how it could work, and should not be construed as advice. Please see a good accountant or lawyer.

Cheers,
GP

 

[alexlee]

Slightly off topic but this is an illustration of why an offset on the PPOR would be better than just paying down the PPOR loan.

In this case, if the person had a PPOR of $600k (say), mortgage of $500k and offset of $250k, that person could just take the $250k out, put it towards the new PPOR, and have a IP with a $500k loan (fully deductible).

Where you just pay off the loan, you would not be able to deduct the interest on the redraw if you buy another PPOR with the money.
Alex

 

[Marina]

A big G'day to Peter too (hope I've got the name right - it's been awhile )
Hi les, Yes thankyou for your thoughts. Peter is great. You do have a good memory!
I understand hhe property could also be sold to yourself from your Hubby, and then you could take out the loan to make it an IP (with all deductions etc). However, this would presume you have a taxable income that would make this exercise worthwhile.

I was thinking this as well y-man. The only problem I have is that I will have to come up with 20% deposit on this purchase. Is this correct?

I find this Hybrid trust really confusing. I will email Dale and do some research.

Thanks to all

 

[Kristine..]

We made a huge mistake.

Hello Marina

No, you didn’t make a huge mistake.

You thought you would like to live in a two storey house, bit now find you don’t like it as much as you thought you would.

You have obviously moved out if you are renting it, and you are getting a good rental so that part of the equation is under control

To buy your new home keep in mind that any money used to purchase a Principal Place of Residence is not tax deductible, so go ahead and draw on the equity in your ‘investment property’ with a clear conscience.

Should you then later turn this next purchase into an investment property, as soon as the property becomes ‘available for rent’ it, too, gains an investment tax status.

Remember that it is the use of the property and the application of the funds which determines tax deductibility.

The same property can go in and out of the tax system innumerable times – just keep good records and sleep soundly at night.

Good luck with finding your new single storey home!

Cheers

Kristine

 

[skater]

Hi Marina

We did a similar thing. Many years ago we had a PPOR & a business that wasn't doing very well. We were tied into this business by the lease we had on the property. This business had a horrible grotty flat above that was vacant.

To cut a very long story short, we moved into the flat & sold the PPOR. With the excess left after paying out the mortgage on the PPOR, we put enough aside to subsidise our business until we could close doors & the leftover amount was put as a deposit on the home that was to be our new PPOR.

Eighteen months later, when it was time to move, our situation had again changed & Hubby had a job that would have meant a lot of travel from this new soon-to-be PPOR. We made the decision to keep the property as an IP & rent somewhere closer to his work.

When we bought our new PPOR, all our funds were already tied up in IP's, so we drew down the equity for the deposit & bought again. Of course the entire amount (including the equity we drew down) was now personal debt.

Over the years we have sold some IP's & bought some more. We still have the ex-PPOR (it's the nicest one we own). We have paid out the loan on our new PPOR & drawn it down again to fund more IPs.

At the end of the day, I don't regret buying it (it's had great CG) & I don't regret not ever living in it although I would really love the extra amenities this house has that our current PPOR does not.

 

[The Y-man]

A big G'day to Peter too (hope I've got the name right - it's been awhile I was thinking this as well y-man. The only problem I have is that I will have to come up with 20% deposit on this purchase. Is this correct?


Thanks to all

Not really..... what happenes is that if it all goes thru ok, you end up effectively with an increased mortgage of $480 on the $600k house, and cash of $220k in your bank.

Cheers,

The Y-man