Purchasing second property

[Davmar]

Hi all,

Long time lurker first time poster.

We are currently in a situation where we are looking at purchasing our second property (house) which we intend to rent out for a short period of time (3-5 years, maybe sooner) than move in as our PPOR.

Our current situation is that we live in our unit which we have been here since 2011. We currently have 150k remaining on our mortgage and $143k in our offset account.

We are looking at using the equity from our unit (320k) to purchase a house which is around the 850k mark. The potential rental income for the house is between 550-600 per week.

Our goal is to rent out the house for 3-5 years until we pay the remainding 150k on our mortgage on the unit. We would sell the unit, transfer the remainding money over to the house mortage and move in.

We are not sure if we should take out a P&I or IO loan on the house for the 3-5 year period? My current income is $81K gross per year.

Once miving into the house after 3-5 years, we would definately be there for atleast 10 years which over that period of time the house would be renovated/extended. Does anyone know what kind of CGT concession/exemption we would be up for?

 

[Brady]

IO - there is no guarantee you will move into that property in 3-5 years times. If you go IO with funds into offset will reduce the interest the same but also preserve the capital which could be at effective at a later stage.

IO gives you options, you control the funds. Less issues with the bank and the tax man.

 

[Davmar]

If going with an IO loan with an offset account, it would be positively geared by $100 per week, which would be $5200pa and be included in my taxable income. On a P&I loan i calculate that I would have to contribute no more than $30 per week extra on top of the money being received by the tennants. With the P&I i will be in a negative gearing situation (very minimal), can i claim the interest from that at the EOFY? with IO i will be positively gearing the property increasing my taxable income?

Our goal is to purchase a house in the area we want in Sydney, while we can. Put tennants in the house while paying off our remaining debt on the unit (150k).

The loan on the house would be approx 500k which would be managed by tennants in the short term. We calculate once our mortgage is paid off on the unit and than sold, we would have approx 250-300k left over from the unit which would be transferred over into the house mortgage making it sustainable for us to move in and manage that loan.

 

[Brady]

I'm confused on what you're saying here...

If you're putting the same money into the loan be it IO and funds into offset or P&I with funds going off the principal the net result should be exactly the same, so you CF/tax etc will be the same.

You can only claim tax expense on the interest paid not the pricipal amount.

 

[wylie]

Can you move into the new place now? If you rent it out for say five years, live in it for ten, you will pay capital gains tax when you eventually sell a much improved house because you didn't live in it first.

You could move in for 12 months, move out again if you really don't want to move in immediately. If you move in immediately after purchase, you "should" never have to pay capital gains tax on sale.

Under your plan, you will pay tax proportionate to the time you rented it out and lived in it (five years rented, ten years PPOR - taxed according to the time it was IP and PPOR).

If you are only renting it to pay down your IP, I see that as robbing Peter to pay Paul.

If you will be doing a major renovation, increasing its value, you will pay tax on the gain you make.

Just a thought.

 

[Redom]

Hi all,

Long time lurker first time poster.

We are currently in a situation where we are looking at purchasing our second property (house) which we intend to rent out for a short period of time (3-5 years, maybe sooner) than move in as our PPOR.

Our current situation is that we live in our unit which we have been here since 2011. We currently have 150k remaining on our mortgage and $143k in our offset account.

We are looking at using the equity from our unit (320k) to purchase a house which is around the 850k mark. The potential rental income for the house is between 550-600 per week.

Our goal is to rent out the house for 3-5 years until we pay the remainding 150k on our mortgage on the unit. We would sell the unit, transfer the remainding money over to the house mortage and move in.

We are not sure if we should take out a P&I or IO loan on the house for the 3-5 year period? My current income is $81K gross per year.

Once miving into the house after 3-5 years, we would definately be there for atleast 10 years which over that period of time the house would be renovated/extended. Does anyone know what kind of CGT concession/exemption we would be up for?

Welcome.

Best to go IO for the loan as Brady mentioned - gives you greater flexibility. In terms of its impact on taxation, you can't claim 'principal' payments as a deduction, only the interest part.

Also, depending on the value of your unit, its best to borrow the equity rather than use the funds in the offset account. Set up another split loan to account for 20% + closing costs of the property, and use this loan to fund the new IP.

This will mean that the funding for your new IP is 100% deductible.

Cheers,
Redom

 

[Davmar]

Can you move into the new place now? If you rent it out for say five years, live in it for ten, you will pay capital gains tax when you eventually sell a much improved house because you didn't live in it first.

You could move in for 12 months, move out again if you really don't want to move in immediately. If you move in immediately after purchase, you "should" never have to pay capital gains tax on sale.

Under your plan, you will pay tax proportionate to the time you rented it out and lived in it (five years rented, ten years PPOR - taxed according to the time it was IP and PPOR).

If you are only renting it to pay down your IP, I see that as robbing Peter to pay Paul.

If you will be doing a major renovation, increasing its value, you will pay tax on the gain you make.

Just a thought.

We can move into the house straight away though we would than have to rent out our unit which is our current PPOR.

We purchased the unit for $380k in 2011 and i renovated it straight away and it has currently been valued at 600k. What CGT would we be up for in this situation?

 

[Davmar]

I'm confused on what you're saying here...

If you're putting the same money into the loan be it IO and funds into offset or P&I with funds going off the principal the net result should be exactly the same, so you CF/tax etc will be the same.

You can only claim tax expense on the interest paid not the pricipal amount.

I am aware that you can only claim a tax expense on interest and not the principal.

Though if i was to take out a PI loan, you would knock off some principal from that loan even though it would be very minimal for a period of 3-5 years on a 500k mortgage. If its IO than no proncipal would be knocked off?

I am not sure if paying a IO loan would be a great benefit come tax time compared to a PI loan where claiming only the interest on that part. At the end its comparing Tax Income (saved) vs Knocking off the principal from the mortgage?

 

[Brady]

If you put the same money that you would pay into the offset rather then the pricipal it will end in same result, same interest charged, same tax. But you would have $$ available in offset which could benefit you in the future.


Example

$300,000 Loan @ 5%

P&I over 30 Years = ~$1611 per month

IO = ~$1250 per month

Difference is $361 per month. If this goes into the offset, the interest charged is exactly the same as P&I.

 

[Brady]

Note the benefit to IO with offset is preserving the funds in the offset account, because at this stage you plan to move into the property and make it your PPOR. But thats in 3-5 years, a lot can and will change in that time. By preserving the funds in the offset you increase your flexibility to make changes that wont affect you financially/tax.

It's always easier to get money from the bank when you don't need it. Having funds in the offset allows you to control the funds.

 

[Peter_Tersteeg]

I think you're going to need some good and very specific structuring advice on this one. I'd suggest calling Redom (posted above). He should be able to figure this out and ensure you get the best solution.

 

[Davmar]

If you put the same money that you would pay into the offset rather then the pricipal it will end in same result, same interest charged, same tax. But you would have $$ available in offset which could benefit you in the future.


Example

$300,000 Loan @ 5%

P&I over 30 Years = ~$1611 per month

IO = ~$1250 per month

Difference is $361 per month. If this goes into the offset, the interest charged is exactly the same as P&I.

Our current mortgage on our unit is PI. We have an offset account with 145k available in it. Our interest payments have been greatly reduced due to knocking off alot from our principal

From what i understand (i might be wrong), the strategy of a IO combined with an offset facility mortgage is a savings account though that available money would not reduce any interest payments because it is not reducing any principal from the mortgage?

Though I can see the advatage of IO in regards to lower repayments giving us more flexibilty and breathing space incase of interest rates rises, loss of tennants, etc.

I guess having that extra money in the offset account on a IO loan (compared to a PI loan) can be used as a lump sum repayment once we sell our unit and move into the house and roll over to a PI loan

 

[Brady]

From what i understand (i might be wrong), the strategy of a IO combined with an offset facility mortgage is a savings account though that available money would not reduce any interest payments because it is not reducing any principal from the mortgage?

An 100% offset account does exactly that 100% offsets.

So you have a loan of $150k and your offset account has $143k so you're only being charged interest on the $7k difference. The interest charged has nothing to do with the loan being IO or P&I.

If your loan was $500k and offset was $493k still would be getting charged interest on $7k the difference. And it doesn't change interested charged if it's IO or P&I.

I suggest sitting down with a decent broker/banker that you can trust to give you sound recommendations around finance, give you a better understanding and focus on your future goals.

 

[Davmar]

Thanks for the info.

Much appreciated

 

[wylie]

We can move into the house straight away though we would than have to rent out our unit which is our current PPOR.

We purchased the unit for $380k in 2011 and i renovated it straight away and it has currently been valued at 600k. What CGT would we be up for in this situation?

Please check this before taking action, but because the unit is your PPOR currently, you could move out, get a valuation at the date it becomes an IP. Get a depreciation report too. If it is worth $600K now, then you take out the money from your offset so the loan on your unit is the highest you can make it, and it becomes tax deductible.

You use the cash from the offset account to help buy your new place and move straight in. The unit (now an IP) has a cost base of $600K and that is the base that you use as the cost base for paying CGT when you do sell it.

So, you should pay no CGT on the gain from $380K to current value as you lived in it from day one. Future growth will be taxed from the cost base of $600K going forward.

 

[Davmar]

Please check this before taking action, but because the unit is your PPOR currently, you could move out, get a valuation at the date it becomes an IP. Get a depreciation report too. If it is worth $600K now, then you take out the money from your offset so the loan on your unit is the highest you can make it, and it becomes tax deductible.

You use the cash from the offset account to help buy your new place and move straight in. The unit (now an IP) has a cost base of $600K and that is the base that you use as the cost base for paying CGT when you do sell it.

So, you should pay no CGT on the gain from $380K to current value as you lived in it from day one. Future growth will be taxed from the cost base of $600K going forward.

This scenario you mention is the first thing that came to my mind last year. This is what i wanted/want.

I asked my accountant about this, and they said if i do this the CGT would be calculated from our purchase price of 388k and not from the evaluation from the day i move out and put tennants in hence it being a IP.

It is confusing when your getting advice from experts and none of them seem to say the same thing

 

[wylie]

This scenario you mention is the first thing that came to my mind last year. This is what i wanted/want.

I asked my accountant about this, and they said if i do this the CGT would be calculated from our purchase price of 388k and not from the evaluation from the day i move out and put tennants in hence it being a IP.

It is confusing when your getting advice from experts and none of them seem to say the same thing

That is why I say you need to ask someone who knows before doing anything. Hopefully someone else who is either an accountant, broker or solicitor will come along and confirm if I've somehow stuffed that up.

I would look at changing accountants. (I'm certainly going to have egg on my face if I've somehow got this wrong, so maybe put up another thread asking this specific question... and if I'm right, then you can change accountants.)