Sell IP to access profit to pay down PPOR?

[Skywalker]

Hi All,

I have an IP that is worth $450,000 with Interest Only Loan of $260,000.
My PPOR Loan is $300,000. I'm looking at the strategy to selling the IP to access the profit to pay down the PPOR Loan.
Currently I will pay the PPOR loan off in 7 years. By selling the IP I would net approx $150,000 profit, thus the PPOR loan would be $150,000 and would take only 3 years to pay off. This then eliminates the non-deductable debt.

My question is...do you think this is the best way to go? Should I look at another strategy?

Thanks in advance,

Skywalker.

 

[BV]

Has your IP been an IP all the time or have you lived in it for any period?

 

[Mr. Fabulous]

Ask yourself this.

'If I fast forward 20 years and think about the growth in that property that I missed out on by selling to shave a couple of years off my mortgage, will I regret it or not? What about the other properties I could have bought using that equity?'

Your answer to that question just might be the answer to your question.

 

[BV]

What about the other properties I could have bought using that equity?

Nothing is stoping him from using the PPOR equity to buy other IP's
(which will be even greater when the PPOR debt is reduced)

 

[The Y-man]

My question is...do you think this is the best way to go? .

Depends on some other factors - eg what CGT will you be up for?

The Y-man

 

[Mr. Fabulous]

Nothing is stoping him from using the PPOR equity to buy other IP's
(which will be even greater when the PPOR debt is reduced)

On the face of it, he's not struggling to pay his PPOR debt. Why sell an appreciating asset to shave a couple years off?

 

[BV]

On the face of it, he's not struggling to pay his PPOR debt. Why sell an appreciating asset to shave a couple years off?

Because it might not be appreciating for a while and if he gets top $ for the IP
and negotiates hard on his next purchases he could negate the selling and buying expenses.
My only concern is the capital gains tax, (if it applies in their situation)

 

[Skywalker]

Thanks for your comments so far...

The IP was my PPOR for 1 year then I have rented it out for 8 years. I have looked at the 6 year CGT rule, but this would then mean my current PPOR would be subject to CGT for 8 years.

By selling the IP the CGT is approx $16,000 and selling costs $20,000.

My thinking is...by paying off my non deductable debt quicker I would save in interest. After I sell the IP I would use the equity in my PPOR to purchase more IP's.

Skywalker.

 

[BV]

With so little CGT IMO its a no brainer.
Reducing PPOR debt is not as dumb as some people think.
Even if the interest savings are only $10Kpa, these will be ongoing and could give you the ability to hold a bigger size portfolio.

 

[jingo]

By selling the IP the CGT is approx $16,000 and selling costs $20,000.

My thinking is...by paying off my non deductable debt quicker I would save in interest. After I sell the IP I would use the equity in my PPOR to purchase more IP's.

Skywalker.

Hi Skywalker,

You'd also need to calculate the costs to buy the replacement IP once you had paid off your PPOR. These costs could easily add another $20,000 to the equation.

I'd also do some costings on the anticipated growth that the IP would achieve over the period of 3 yrs and 7 yrs and then work out if the strategy is viable.

I'd be surprised if it was.

Why not just keep the IP and PPOR and keep investing? You may eventually get to a stage where you have enough assets to debt recycle and can pay the PPOR off this way.

Hope this helps.

Regards Jason.

 

[Mr. Fabulous]

I was thinking about this earlier today. Came up with this idea.

If I approached you and said to you 'I can show you how to shave 4 years off your PPOR mortgage. Pay me $55,000 and I will show you.' Would you do it?

Because that is essentially what you are doing by selling your I.P.

 

[BV]

I was thinking about this earlier today. Came up with this idea.

If I approached you and said to you 'I can show you how to shave 4 years off your PPOR mortgage. Pay me $55,000 and I will show you.' Would you do it?

Because that is essentially what you are doing by selling your I.P.

Mark
Its not only about time.
He'll be saving over $40K in non deductible interest over the 4 years.
Now if he decided not to pay off the PPOR mortgage and to use the equity and buy more IP's the interest savings of $10K PA from this transaction would be ongoing

 

[Brett IP]

Thanks for your comments so far...

The IP was my PPOR for 1 year then I have rented it out for 8 years. I have looked at the 6 year CGT rule, but this would then mean my current PPOR would be subject to CGT for 8 years.

By selling the IP the CGT is approx $16,000 and selling costs $20,000.

My thinking is...by paying off my non deductable debt quicker I would save in interest. After I sell the IP I would use the equity in my PPOR to purchase more IP's.

Skywalker.

Skywalker, no harm having a go at selling it yourself first either. $20k is a LOT of money, you would be over the moon if you saved that by listing it on RE.com without an agent.

On the surface I believe you should sell and pay down the non-deductible debt. Just save as much as you can on the process (by listing for sale yourself) and re-invest in IP's using the equity.

Only you know all the sum's and pros vs cons though

 

[srini]

I have been thinking about this as well. Questions to ask yourself are:

1. Is your IP CF-, neutral or CF+. If neutral or CF+, it may not make sense to sell something that doesn't cost anything to hold
2. Selling costs - as someone mentioned, try to sell it yourself since you are not under time pressure to sell

I think this is a sound strategy. Our strategy is to hold IPs till there's enough equity to pay off PPoR completely after sales costs.

At this point, we'll re-consider the options - either sell all/part of the IPs to pay down PPoR debt and re-invest when we feel like it.

 

[Mick C]

Hi.

My thoughts:
1. Yes you have no non-deductable debt after you do this...but at the same time you also lose your deductible debt benefits....

2. You lose your potential and flexabililty of 2 capital growth... Many years from today you may not want to live in this home anymore and may choose to Rent it out.

If your retired, then it would make sense to a point...but if your still working, paying tax and young enough to continue to invest; then i would say Keep the IP and employ a different strategy in reducing your "tax" and debt.


Regards
Michael