Question about Loan-Structure and minimising CGT

[bowfinger]

Hi All,

I would appreciate your advice on the below loan structure for a 300K loan, for a $530K IP. I don't have any other mortgages.

LOAN STRUCTURE

• 4.55% "choice package" with NAB (has redraw & offset features)

• Will choose variable interest rate (but might fix half at 4.55% for 5 years - still undecided)

• Will choose an Interest-Only loan, but will make extra repayments on the principle each month (especially while rates are low). My reasoning is that if it ever gets hard to repay the loan, I can fall back to paying the monthly Interest-Only commitment

STRATEGY FOR MINIMISING CAPITAL-GAINS TAX
My tax-lawyer friend advised that it would be a good idea to let go of the existing tenant, move into the IP for a month, and find a new tenant afterwards, in order to avoid CGT when the unit is eventually sold (which won't be for another decade or more). Thoughts?

 

[Jess Peletier]

A couple of things I would do differently -

* put down a 20% deposit only and borrow the rest of the funds. Put your extra cash in an offset account.
* Don't pay off principle, put it in offset instead.

Both of these actions give you more control of your cash, give greater flexibility and in the event you buy a ppor down the track it will maintain maximum deductible interest.

In regard to cgt, ask a tax person but pretty sure this would amount to a tax avoidance scheme. And the cgt exemption only goes for 6 yrs after you move out, assuming you're not living in another ppor.

 

[Durka]

I did something similar previously. A few things to keep in mind:

- I assume you are renting elsewhere / living with someone else in a home you don't own. You can't claim the PPOR exemption for more than 1 property at a time.
- You must move in immediately on purchase, and have the tenant out before / on settlement. If the tenant is there on purchase, the exemption doesn't apply.
- When you do move in, be sure to leave a sufficient paper trail regarding this. Utilities, Drivers Licence, Electoral Enrollment.
- I was told I should live in the property for at least 2 months, and that would give a PPOR CGT exemption for up to a 6 year period (or whenever I move into a PPOR I own, whichever comes first). Check these dates with someone knowledgeable before proceeding.

If you want to buy an IP but not a PPOR, this is an effective way to go about it. If buying with intent to use the property as an IP it may not work out. In my case I was unsure whether it would be my PPOR, but life circumstances meant I moved overseas shortly after settling, and turned it into an IP. IANAL so seek professional advice on the issue. When I investigated this the ATO website was extremely unclear on the issue.

 

[Terry_w]

STRATEGY FOR MINIMISING CAPITAL-GAINS TAX
My tax-lawyer friend advised that it would be a good idea to let go of the existing tenant, move into the IP for a month, and find a new tenant afterwards, in order to avoid CGT when the unit is eventually sold (which won't be for another decade or more). Thoughts?

Strategy for potentially eliminating CGT - move in and establish the property as your main residence, then move out, rely on s118-145 to keep the property as your main residence for up to 6 years while absent.

I agree with Jess - best not to pay down the loan but store cash in the offset. If things get tight you pay the loan with the excess funds.

If you paid down the loan and things got tough you would need to miss payments, even though you may be ahead, and this will look bad, especially if you need to refinance (to extend the loan term and further lower repaymennts).

 

[albanga]

Great reply Terry!
Just another consideration is if you are entitled to the FHOG then the length you plan to stay in the property is also important.
In Victoria for example you would need to occupy the property for a length of 12 months to be entitled to the grant (along with everything else).

 

[adrianclews]

Strategy for potentially eliminating CGT - move in and establish the property as your main residence, then move out, rely on s118-145 to keep the property as your main residence for up to 6 years while absent.

I agree with Jess - best not to pay down the loan but store cash in the offset. If things get tight you pay the loan with the excess funds.

If you paid down the loan and things got tough you would need to miss payments, even though you may be ahead, and this will look bad, especially if you need to refinance (to extend the loan term and further lower repaymennts).

Sorry to butt in, but if i was to build 3 units and i moved into one when they are complete moved out after 6 months. How does this affect the depreciation side of things. Cause on the other 2 units i will be able to claim depreciation from day one.
Is there a benefit in moving in for 6 months or so in this scenario?

 

[Terry_w]

Sorry to butt in, but if i was to build 3 units and i moved into one when they are complete moved out after 6 months. How does this affect the depreciation side of things. Cause on the other 2 units i will be able to claim depreciation from day one.
Is there a benefit in moving in for 6 months or so in this scenario?

You can't claim depreciation on your property while living in it.(unless renting out part or using it as a business)

 

[adrianclews]

You can't claim depreciation on your property while living in it.(unless renting out part or using it as a business)

Hi terry.
Yes thought that was the case

 

[Paul@PFI]

Hi All,

STRATEGY FOR MINIMISING CAPITAL-GAINS TAX
My tax-lawyer friend advised that it would be a good idea to let go of the existing tenant, move into the IP for a month, and find a new tenant afterwards, in order to avoid CGT when the unit is eventually sold (which won't be for another decade or more). Thoughts?

If there is a tenant already the pro-rata CGT method would apply in any event so moving in for a month will just make 1 month of the total period of ownership exempt. Given the intended IP use its a largely futile exercise unless you are thinking the 6 year main residence absence rule AND in the next six years you don't intend to buy and live in an alternative property you own (or one owned by spouse / partner).

If you believe you may satisfy the main residence absence rule there may be benefits. Important to retain all evidence and record those dates etc.

 

[bowfinger]

A couple of things I would do differently -

* put down a 20% deposit only and borrow the rest of the funds. Put your extra cash in an offset account.
* Don't pay off principle, put it in offset instead.

Both of these actions give you more control of your cash, give greater flexibility and in the event you buy a ppor down the track it will maintain maximum deductible interest.

Thanks for this Jess - you're right, putting the money into an offset account would give much more flexibility if I'm ready to buy a 2nd IP (or need to fork out for an emergency, wedding, holiday, etc.) within the next 5 years.

 

[bowfinger]

- You must move in immediately on purchase, and have the tenant out before / on settlement. If the tenant is there on purchase, the exemption doesn't apply.
- When you do move in, be sure to leave a sufficient paper trail regarding this. Utilities, Drivers Licence, Electoral Enrollment.
- I was told I should live in the property for at least 2 months, and that would give a PPOR CGT exemption for up to a 6 year period (or whenever I move into a PPOR I own, whichever comes first). Check these dates with someone knowledgeable before proceeding.

Great info - thanks Durka. I didn't realise it only applies for up to 6 years.

Settlement is in 3 weeks so I'm not sure if there will be enough time to go through with this ; plus Jess mentioned it could be construed as tax avoidance - which I wasn't aware of!

 

[bowfinger]

Strategy for potentially eliminating CGT - move in and establish the property as your main residence, then move out, rely on s118-145 to keep the property as your main residence for up to 6 years while absent.

I agree with Jess - best not to pay down the loan but store cash in the offset. If things get tight you pay the loan with the excess funds.

If you paid down the loan and things got tough you would need to miss payments, even though you may be ahead, and this will look bad, especially if you need to refinance (to extend the loan term and further lower repaymennts).

Sir, thanks for this! Appreciate you quoting the exact income tax acts, and I didn't know that a surplus in the offset account be used to compensate for repayments if one is behind. Very much appreciated.

 

[Paul@PFI]

Great info - thanks Durka. I didn't realise it only applies for up to 6 years.

Settlement is in 3 weeks so I'm not sure if there will be enough time to go through with this ; plus Jess mentioned it could be construed as tax avoidance - which I wasn't aware of!

Factually residing in a property and becoming entitled to the main residence exemption is not a act of tax avoidance or a scheme. Part IVA would not apply to a taxpayer making a choice available under law. Avoidance concerns may arise from falsely claiming the concession or disregarding the taxing period/s later.

 

[albanga]

Paul can I just clarify your post.
Say you purchase an IP that has a tenant contracted after settlement (say 6 months). When they move out, if you then move in for say 2 months and satisfy the criteria for the property to become your main residence and then move out and rent it again.
If you do not then claim another main residence for 6 years would you be exempt from CGT with the exception of the first 6 months the property was tenanted after settlement?