Problem - too much equity?!

[Lukey13]

Well, no it's not really very much equity at all... it's more a problem of not being able to access PPOR equity without selling, and not wanting to sell because the current stage of the market cycle seems to be more conducive to buying than it does selling.

So I was wondering whether the following scenario would at all be possible (legally, financially and practically):

Current properties:
$420K PPOR ($240K loan) = $302/week IO (fixed rate soon to end!)
$320K IP1 ($330K loan) = holding costs $85/week (post-tax)
SUMMARY: Out of Pocket Expenses = $387/week ; Gross Assets = $740K

Short-term goals:
* Upgrade PPOR to a new(ish) $550K house
* Keep IP1
* Not have to sell in current stage of market cycle, but be able to access equity in current PPOR

Strategy 1:
* Keep IP1
* Create a trust of some sort (family/HDT/other?)
* Trust borrows (however it works) $440K (fair market value, plus costs) to purchase current PPOR as IP2
* IP2 is now negatively geared (is this possible in a trust?) against rental income = likely holding cost of $260/week
* Sale of old PPOR to trust = profit of $420K - $240K loan - $10K costs = $170K profit (CGT free?)
* Purchase new PPOR for $550K + $25K costs - $175K deposit = $400K loan = $668/week IO
SUMMARY: Out of Pocket Expenses = $1,013/week ; Gross Assets = $1.29M


What problems might this strategy cause?????


Some considerations:
* Current PPOR was purchased as Joint Tenants, between my wife and I
* IP1 was purchased as Tenants in Common - 99% in my name (higher income earner), 1% in my wife's name
* Not much household income would actually go through any created trust (I think?) - two salaries = $150K; business income = $40-$50K; rental incomes = negatively geared

 

[alexlee]

Free of capital gains tax, yes. NOT free of stamp duty. It'll cost more than $5k. Costs on a $550k purchase would be around 25k, surely. 10k wouldn't even cover stamp duty.

Is there any reason why you want to move the pcurrent PPOR into a trust?

If I'm reading these numbers right, at the end your debt will be:

Trust:
IP2 val/debt 420k/440k (your estimates of costs are low)

Personal:
PPOR 550k/405k (estimates of costs are low)
IP1 320k/ 330k

Total: 1.29m assets v 1,175k
LVR = 91%

Half your supposed 180k in equity will be eaten up by costs. Even assuming you can find a bank to lend you at this level (I'm not even including LMI for all that 105% lend in the trust).
Alex

 

[Lukey13]

Free of capital gains tax, yes. NOT free of stamp duty. It'll cost more than $5k. Costs on a $550k purchase would be around 25k, surely. 10k wouldn't even cover stamp duty.

Is there any reason why you want to move the pcurrent PPOR into a trust?

If I'm reading these numbers right, at the end your debt will be:

Trust:
IP2 val/debt 420k/440k (your estimates of costs are low)

Personal:
PPOR 550k/405k (estimates of costs are low)
IP1 320k/ 330k

Total: 1.29m assets v 1,175k
LVR = 91%

Half your supposed 180k in equity will be eaten up by costs. Even assuming you can find a bank to lend you at this level (I'm not even including LMI for all that 105% lend in the trust).
Alex

Hi Alex

Thanks for your reply and suggestions (which I've incorporated into some of my original "rough" figures).

Only today I conceived the (perhaps fleeting) idea of transferring my current PPOR as an IP to a trust. Basically, I'm looking for a way to access the $180K equity to put towards another PPOR without having to sell while values are "pausing for a breather". I also want to maximise deductible debt whilst minimising non-deductible debt. One other factor is that the current PPOR would be handy to hold onto as an IP as it has good future development potential.

Other scenarios might include:
* Sell the PPOR, use the equity for purchase of new PPOR, keep IP1
Cons: Lose future development potential, selling in "wrong" part of market cycle
Pros: Minimise non-deductible debt, keep overall repayments low(ish)

* Change PPOR into IP2, purchase new PPOR, keep IP1
Cons: Massive non-deductible debt on PPOR, higher overall repayments (probably unmanageable)
Pros: Retain future development potential of IP2 (former PPOR)

* Remain in current PPOR, keep IP1, purchase a future PPOR as IP2 and sit tight for a year or two when values start to move again and then reconsider options allowing IP2 to become new PPOR
Cons: Having to compromise lifestyle a little
Pros: Likely much higher depreciation deductions and rental yield on IP2 than those for current PPOR if it were changed to an IP (being an older house), financially the smartest thing to do

Perhaps I've answered my own question, or at least reframed it as current lifestyle versus future financial gains

 

[alexlee]

Lukey, if I'm reading your numbers right, most of what you're proposing will cause a large chunk of that equity you're eyeing to be lost through stamp duty and LMI. How exactly do you plan on getting >100% LVR loans?
Alex

 

[Lake]

Well, no it's not really very much equity at all... it's more a problem of not being able to access PPOR equity without selling, and not wanting to sell because the current stage of the market cycle seems to be more conducive to buying than it does selling.

So I was wondering whether the following scenario would at all be possible (legally, financially and practically):

Current properties:
$420K PPOR ($240K loan) = $302/week IO (fixed rate soon to end!)
$320K IP1 ($330K loan) = holding costs $85/week (post-tax)
SUMMARY: Out of Pocket Expenses = $387/week ; Gross Assets = $740K

Short-term goals:
* Upgrade PPOR to a new(ish) $550K house
* Keep IP1
* Not have to sell in current stage of market cycle, but be able to access equity in current PPOR

Strategy 1:
* Keep IP1
* Create a trust of some sort (family/HDT/other?)
* Trust borrows (however it works) $440K (fair market value, plus costs) to purchase current PPOR as IP2
* IP2 is now negatively geared (is this possible in a trust?) against rental income = likely holding cost of $260/week
* Sale of old PPOR to trust = profit of $420K - $240K loan - $10K costs = $170K profit (CGT free?)
* Purchase new PPOR for $550K + $25K costs - $175K deposit = $400K loan = $668/week IO
SUMMARY: Out of Pocket Expenses = $1,013/week ; Gross Assets = $1.29M


What problems might this strategy cause?????


Some considerations:
* Current PPOR was purchased as Joint Tenants, between my wife and I
* IP1 was purchased as Tenants in Common - 99% in my name (higher income earner), 1% in my wife's name
* Not much household income would actually go through any created trust (I think?) - two salaries = $150K; business income = $40-$50K; rental incomes = negatively geared

You could get your wife to sell the 50% share in PPOR to you.

As you said, PPOR valuation = 420k, loan 240k. Split the loan two ways: you 120k, wife 120k.

Wife sells you 50% of the PPOR at 210k. You take out 210k loan, she gets 210k to close down her 120k loan, she's left with 90k that you can buy the new PPOR with.

Your PPOR now has a loan of 120k + 210k = 330k, just under 79% LVR, and you can turn the PPOR into IP2.

Granted I haven't taken stamp duty into consideration here, as I don't know how to calculate the SD in this incidence.

 

[Lukey13]

You could get your wife to sell the 50% share in PPOR to you.

As you said, PPOR valuation = 420k, loan 240k. Split the loan two ways: you 120k, wife 120k.

Wife sells you 50% of the PPOR at 210k. You take out 210k loan, she gets 210k to close down her 120k loan, she's left with 90k that you can buy the new PPOR with.

Your PPOR now has a loan of 120k + 210k = 330k, just under 79% LVR, and you can turn the PPOR into IP2.

Granted I haven't taken stamp duty into consideration here, as I don't know how to calculate the SD in this incidence.

Thanks Lake, that sounds like a good strategy that I haven't given much thought to before.

In doing this I assume the costs would be stamp duty (at PPOR concession rather than IP rate if we did the purchase prior to changing it over to an IP) on a $210K borrow for $210K purchase - which I calculate at being $2,940. I suppose the usual legal/conveyancing costs would be another $1,500. That sounds like a cheap way to access $90K equity to be used to purchase the next PPOR.

Would there likely be any other costs/complications involved?