Selling an IP to pay down PPOR

[Jandnat]

Hoping for some opinions that will can help us explore the pros and cons of selling one of our rental properties to pay down our PPOR. We have a number of rentals so this wouldn't mean leaving the game by any stretch, just reduce our non deductible debt. The numbers are as follows

Rental property – Purchased for $160k including costs, $98k loan, worth around $450k, long term tenant at $400/week
PPOR - $345k remaining on loan (valued at $750k, so will still have heaps of equity if we need it)

My rough figures are if we sold our rental

- After paying out loan ($352k remaining)
- Around 15k in RE fees, conveyancing etc ($337K remaining)
- After 50% capital gains discount and assuming we are in the highest tax bracket that year should leave a tax bill of around $50k (it is always less then expected but going worst case)
- Give us $287k to pay down our PPOR

Thanks

 

[Kenster]

You may feel regretted to kill the golden goose later on if that IP value grows in the next x years.

Some options to keep that IP:

- Rent out PPOR (loan becomes deductible), use this rent to rent a new home

- Channel all income into paying off PPOR loan, including all IP rental surplus (while watching out the Hart case)

- Exchange ppor for a new one: Aim is to get a new ppor with smaller non-deductible loan, eg. Sell high and buy low

 

[Jandnat]

I may have missed a few things.

We are unable to down size our PPOR in the short term - i am due to have our first baby in less than 4 weeks. Im also afraid my standards would not allow us to down grade
Selling this property would put us back under the land tax threshold as it is owned in our personal names.
After paying down PPOR we intend to use this equity to buy a higher yeilding commercial property and move our business into part of it (we currently lease a building where our business is based)

 

[alexlee]

Capitalise interest on the IP?

 

[Kenster]

Capitalise interest on the IP?

Yes, this is what I am getting at.

Consult with tax expert/s to ensure you are not in the steps of the Hart case (where they channelled 100% rental income to paying off non-deductible debts).

Maybe, put as much of your earned income into paying off ppor debt and dip into rental income for occassional shortfall of living expense?

 

[alexlee]

After paying down PPOR we intend to use this equity to buy a higher yeilding commercial property and move our business into part of it (we currently lease a building where our business is based)

That changes things, because it's not just paying down the PPOR loan v continuing to own the property.

 

[depreciator]

I sold an IP last year to pay off the PPOR. There are probably all sorts of reasons this was silly. But I'm enjoying the freedom it has given me.
Scott

 

[Terryw]

Hoping for some opinions that will can help us explore the pros and cons of selling one of our rental properties to pay down our PPOR. We have a number of rentals so this wouldn't mean leaving the game by any stretch, just reduce our non deductible debt. The numbers are as follows

Rental property – Purchased for $160k including costs, $98k loan, worth around $450k, long term tenant at $400/week
PPOR - $345k remaining on loan (valued at $750k, so will still have heaps of equity if we need it)

My rough figures are if we sold our rental

- After paying out loan ($352k remaining)
- Around 15k in RE fees, conveyancing etc ($337K remaining)
- After 50% capital gains discount and assuming we are in the highest tax bracket that year should leave a tax bill of around $50k (it is always less then expected but going worst case)
- Give us $287k to pay down our PPOR

Thanks

What about paying down the PPOR, and setting up a LOC and borrowing to pay the CGT?

 

[Rolf Latham]

Yes, this is what I am getting at.

Consult with tax expert/s to ensure you are not in the steps of the Hart case (where they channelled 100% rental income to paying off non-deductible debts).

Hiya

I recall harts Vs ATO was a diff beast ............ALL interest was capitalised and deemed "deductible" thus there was a mixed debt issue more so than a capitalised interest issue,but the accountants can set me straight.

ta
rolf

 

[Terryw]

Harts was deemed a scheme to avoid tax. It was a product set up specifically for this purpose and marketed as such.

It is still possible to capitalise, but you should seek expert advice so as not to fall into the catgeory of schemster

 

[Jandnat]

Thought people might be interested to know what we ended up doing in relation to this question I posted at the beginning of last year.

The IP was in my husbands name only, I purchased it from him for $450k and my husband used the money to pay down our PPOR. We did this at the beginning of this year after discussions with our accountant ( we had loses carried forward which took care of the capital gains )

Cost us 14k in Stamps and 1k in legals. We now have a deductable debt of 460k on the IP, a fully paid off PPOR and puts us both back under the land tax theshold in QLD ... Happy days...

oh and Baby no 2 on the way... it's been a busy couple of years

 

[Rolf Latham]

Nice

Spousal sale can solve many issues

ta'rolf

 

[morg]

Good stuff.
I've been considering doing something similar. We kept our old PPOR turned IP when we upgraded. Ended up with a massive non deductible loan and a fully paid off IP.
After seeing our accountant today and seeing the amount of tax I've paid, I really need to act.
Just trying to run the numbers to see if it's feasable to buy it off my wife and direct proceeds to PPOR.
All these numbers are doing my head in.
Just wondering if you had any difficulty finding a lender to accept that you were borrowing funds for IP, and that proceeds of sale would come off existing debt, ie total exposure would remain the same ?

 

[wylie]

Just wondering if you had any difficulty finding a lender to accept that you were borrowing funds for IP, and that proceeds of sale would come off existing debt, ie total exposure would remain the same ?

Don't stress about finding a lender... find a good broker and let them find the right lender.

 

[INVSTOR]

Nice

Spousal sale can solve many issues

ta'rolf

I wonder how much I'd get for my hubby.

Well done, thanks for update. Saves hassle of looking for another property, building inspections, vacancy while trying to sell, sale commision costs, legals. It's such a nice feeling being PPOR debt free.

 

[Terryw]

Thought people might be interested to know what we ended up doing in relation to this question I posted at the beginning of last year.

The IP was in my husbands name only, I purchased it from him for $450k and my husband used the money to pay down our PPOR. We did this at the beginning of this year after discussions with our accountant ( we had loses carried forward which took care of the capital gains )

Cost us 14k in Stamps and 1k in legals. We now have a deductable debt of 460k on the IP, a fully paid off PPOR and puts us both back under the land tax theshold in QLD ... Happy days...

oh and Baby no 2 on the way... it's been a busy couple of years

Very good and thanks for the update.

$15,000 in costs, but have you worked out the extra tax savings you are getting each year? No non deductible debt and greater tax savings has to be good.

 

[SYF]

Will it work for us too??

I have read the thread and wondered if 'spousal sale to reduce nondeductible debt' would work for us as well...

We have 322k debt on PPOR now worth 530k. We bought our first IP last Nov for 397k and debt is 318k. This IP was purchased 50/50 ownership between me and my husband. We made a mistake of not having this structured despite our mortgage broker's advice of my husband owning 99 and me owning 1% tenant in common. (I still wonder why I forgot to do it...) Hubby earns around 100k and I earn 20k working part time.

Can my husband purchase half of IP and then use fund to pay down our PPOR debt?
I have no idea....It doesn't sound right....How does it work?

Thanks

 

[Terryw]

I have read the thread and wondered if 'spousal sale to reduce nondeductible debt' would work for us as well...

We have 322k debt on PPOR now worth 530k. We bought our first IP last Nov for 397k and debt is 318k. This IP was purchased 50/50 ownership between me and my husband. We made a mistake of not having this structured despite our mortgage broker's advice of my husband owning 99 and me owning 1% tenant in common. (I still wonder why I forgot to do it...) Hubby earns around 100k and I earn 20k working part time.

Can my husband purchase half of IP and then use fund to pay down our PPOR debt?
I have no idea....It doesn't sound right....How does it work?

Thanks

Yes. The sale to him of your half would release money which you could use to pay private debt. since he is buying an investment property he could borrow and claim the interest for this.

You should apply for a loan and then just see a conveyancer to do the transfer from both names to one. You could also see an accountant to run the figures. What out for stamp duty and CGT.

You should also consider future income and taxes too. Once positive income he would be paying more tax on the rent then you would be if you are on a lower income.

 

[Jandnat]

We had no problem with the lend, both loans were with the NAB. Had to get 3 written agent appraisals as part of the application. We (me) fluffed the numbers at the time and actually ended up with an additional 100k woops. The savings are fantastic now ip is fully deductable and about $1800 a year in land tax savings. Just hope the husband doesn't leave me now he has offloaded all his debt on me . Our solicitor was going to put " for true love and affection" on the transfer docs, I advised her we would prefer it to be a normal sale don't need to attract any attention to ourselves from the Ato or land titles office.

 

[Jandnat]

I have read the thread and wondered if 'spousal sale to reduce nondeductible debt' would work for us as well...

We have 322k debt on PPOR now worth 530k. We bought our first IP last Nov for 397k and debt is 318k. This IP was purchased 50/50 ownership between me and my husband. We made a mistake of not having this structured despite our mortgage broker's advice of my husband owning 99 and me owning 1% tenant in common. (I still wonder why I forgot to do it...) Hubby earns around 100k and I earn 20k working part time.

Can my husband purchase half of IP and then use fund to pay down our PPOR debt?
I have no idea....It doesn't sound right....How does it work?

Thanks

I would have thought that since your husband is paying the bulk of the tax this structure would be fine. You might be better capitalising the interest and redirecting the funds into the PPOR loan for a while.