Query on selling IP to payout personal home

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From: Mark Noonan


Hi,

I have just recently bought my own home, and have 2 IP's. One of them has quite alot of equity in it.

I have had some advice to sell one IP, use all the proceeds from its sale less CGT to payout as much of my personal home loan.

The reason behind this is to get rid of my non productive debt as quick as possible, and then get back into another couple of IP's using the equity now on my own house.

By selling the property I can probably reduce my personal home loan debt to half what it currently is & pay it out in 3 years. Which I could redraw to purchase another property straight away.

I'm interested in any opinions on this strategy.

Cheers,
Mark
 
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Reply: 1
From: Will G


Sounds like the right idea.

However buying and selling IP's costs you a lot of $$'s that will take a long time to recover (selling fees, stamp duty, legals ....) If you already have the IP and it is a 'good quality' IP then keep it.

If you have an IP that is likely to cost you $$'s in repairs/hastles then it might make more financial sense to get rid of it.

It may be a good time to sell the IP when the market is high and then buy another IP when the market has 'levelled out'. You are more likely to get 'value for money' in these times.

These are my personal views and should only be taken in context with your situation.
 
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Reply: 1.1
From: Dale Gatherum-Goss


Hi

I don't like the idea at all!!!

By selling your IP, you give the government money in CGT, you give the real estate agent their fees, and you give the solicitor more money to do their work.

You get paid last!! If at all.

You would be wiser to just leave the situation as is, and, concentrate on paying off your home loan as quickly as possible.

After all, you invest to create wealth and therefore I would look at every decision in terms of your goals and not the tax that you pay.

Good luck

Dale
 
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Reply: 1.1.1
From: Rixter ®


Why not redraw some equity from the Ip with the lowest LVR & deposit that into your PPOR....That way your not hit with CGT, agents selling fees and you dont lose an Ip.

Happy Investing,
Rixter :)
 
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Reply: 1.1.1.1
From: Rixter ®


I'm waiting for someone to pick up the deliberate mistake I overlooked by doing what I suggested above??!!
Happy Investing,
Rixter :)
 
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Reply: 1.1.1.1.1
From: Will G


You won't be able to claim the interest on the loan taken against the equity on the IP if it is used to lower the loan on your own home.

Here are some calculations that may make help decide ...

example :-
Notes :
1. These calculations are very rough and don't include legal & other fees.
2. There is a reasonable chance that they may not be correct.
3. Interest rate based on 3 year fixed rate
4. Calculations are based on the IP being 'neutrally geared'.

Your marginal Tax Rate : 48cents/dollar
Your home :
- You Owe $100k @ 6.5%/pa
- Costs you $6500(with after tax dollars)

Your IP :
You have owned for more than XX years
thus the CGT is calculated on half of the
gain (new CGT rules).
You owe $200K
Sells at $300K
CGT = 0.48 * 100K/2 = $24800
Pay out : ($300K - $200K - $24800) = $75.2K

Savings (per first year)
6.5% * $75.2K = $4888

Conclusions

1. You are paying $24800 + selling expenses to save $4888(after tax) in the first year
2. You will save more $$ by selling when the interest rates rise.
 
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Reply: 1.1.1.1.1.1
From: Rixter ®


Will,
Well done chum, you go to top of the class!
Happy Investing,
Rixter :)
 
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Reply: 1.1.1.1.1.2
From: Dee Mee


so what if u cant claim the interest
Say u keep the lvr at 80% , draw down 60k, and put this 60k into your home loan.
60k x .065= 3900
save this much in the 1st yr

plus u get captital growth of the ip
say a conservative 6%
300000 x .06 = 18000
$18000 in one yr
what if your getting 10% growth - 30k

ok so u lose the tax deduction on the interest
60k x .065 = 3900
but u have another ip right
with 2 ips, your taxable income should be pretty low anyway.
depending on your tax rate
say at the 30% level - somewhere around 1200 worse off.

so for around 2k - u get 18k-30k cap growth
check your sums with a mortgage broker!
drawing down may be better,
 
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Reply: 1.1.1.1.1.2.1
From: Dee Mee


can i take my reply back?? silly me
just had a thought
if interest isnt tax deductable then there is no point in drawing down and paying off the home loan assuming interest rates are the same. you'd just be transferring things to a different place
given that then i'd agree with dale, hold onto the ip and pay off the home.

there is also the emotional factor of owning your own home. You may feel more comfortable paying it off quicker by selling
but you'd forgo a lot of cap growth, 300000 house 4yrs later might be 400000.

but hey its a good problem to have, 2 ips and a home!!
 
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Reply: 1.1.1.1.1.2.1.1
From: Sim' Hampel


You can delete your own posts (look in the top right hand corner of the menu on your message, second in from the right is the "Delete" option).

However, I think we get more out of you analysing and correcting your own post, so don't bother ;-)

 
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Reply: 1.1.1.1.1.2.1.1.1
From: Donna L


I don't know how much equity is involved
but maybe you could talk to Uncle Steve
Navra about converting the equity into an
income stream which you can apply to the
home loan and use some of the equity as
deposit on another IP . This way interest
would be tax deductible. :)

Donna L
 
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Reply: 1.1.1.1.1.2.1.1.1.1
From: Manny B


Hi Mark,

I think the overall consensus is to not sell your IP to reduce your mortgage on your PPOR... I would keep the IP but look at structuring your loans to favour you in the long run, ie. ensure both IP loans are interest only & any pay leave your home loan as a PI loan (paying off more when you have the $$$)... that is my 2cents worth...

Cheers,

Manny
 
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Reply: 2
From: Rolf Latham


Hi Mark

Dont think its that clear cut with the information you have provided - just yet.

HOw long will it take you to kill your PPOR debt and whatt is the ratio of that debt to your investment debt.

What are your Ips performing like and what are your future expectations.

Whats your income tax bracket, and are you 100 % title holder of the props.

Ta

Rolf
 
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Reply: 1.1.1.1.1.2.1.1.1.1.1
From: Mark Noonan


Hello everyone,

Thank you all for your responses, it has given me more to think about. I'm driving my wife crazy with all my but what ifs!

It's good to bounce idea's off the experienced people available on this forum.

Cheers,
Mark
 
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Reply: 2.1
From: Mark Noonan


Hi Rolf,

I'm in the top tax bracket. I have 100% title on the IPs.

The IP I was looking to sell is as follows:

Purchased : 1993
Price : 85,000.00
Loan IO : 55,000.00
Current Value : 145,000.00

2nd property: (not selling)
Purchased : 1999
Price : 155,000
Loan Fixed IO : 160,000 (plus purchase costs
Current Value : 170,000.00

Personal home:
Purchased : 2001
Price : 131,000.00
Loan P&I 100% Offset : 122,000.00
Current Value : 150,000.00
Time to clear loan: 9 years.

I was looking to convert my personal home to a LOC, and with the proceeds from the sale of the IP reduce the debt to $50,000.00 which could be paid out in 3 years.

(We are planning to have a family, that is one of the other reasons it was suggested to me as an option.)

Cheers,
Mark
 
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Reply: 2.1.1
From: Mark Noonan


Hi Rolf,

Future prospects, well some opinions, are that the market has had it's spurt in this area, and will now go back to sleep as it were for another 6 years. The capital gain has mainly happened over the last 3 years.


Cheers,
Mark
 
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