Selling PPOR vs renting out

[geoffw]

Hi,

I've been asked a question by a friend (who reads the forum).

He is going to buy a new PPOR. He wants to sell his old PPOR (when the new one is built) and then buy a new Investment Property.

I've had a look at the thread http://www.somersoft.com/forums/showthread.php?s=&threadid=215 but was interested to try a few scenarios

I've suggested that he rent out his old PPOR when that happens. But he's concerned that if he did that, he would miss out on the tax advantages of a loan taken out for investment purposes.

I've put together a simple spreadsheet. But it's full of holes at the moment. But it's a starting point as to figure out whether one way is better than the other.

I don't know my friends situation, so this might help. Especially if people can plug holes.

Geoff

 

[manny]

Hi Geoff,

sounds like your friend has made up his/her mind re: moving into a new PPOR (as it is being built). What I would do is the following (sorry didn't have time to update the spreadsheet, but just did some quick summs in my mind):

* I'd sell the PPOR & take advantage of the Capital Gain saving.

* I'd buy the new PPOR with the proceeds of the sale (he/she'd be best talking to a mortgage broker &/or accountant on how to structure the loans &/or starting up a "Trust" for their IP portfolio since they will be starting fresh).

* I'd then look at buying IPs with 100%-105% (without mortgate insurance) loan BUT using equity from the PPOR. This way you can claim the entire loan of the IPs (which over the years, the tax savings made through claiming interest expenses from all the IP loans versus just converting the existing PPOR to an IP & only claiming the loan amount), which over the years the benefits should far outweigh any equity loss due to the sale. Also by converting the current PPOR to an IP, I'd assume they would need a 100% loan for their new PPOR, which would need to be paid through their after-tax dollas. As mentioned above, if they seek advice from a good IP accountant & structure their finances well now (looking at a Trust if it suits their circumstances) it would be a good foundation to a great wealth creation journey.

Just my 2cents worth...

Cheers,

MannyB.

 

[Luke]

Hi GeoffW,

Nice spreadsheet: but some queries:
* you don't have anything listed as tax claimable (payable) for the hold strategy.
* Under Net income I think the equation should be C17+ C18, and likewise for D17+D18, not minus.
* Clearly it's a simple model, and you have no allowance for other costs and depreciation. These obviously have big effects.

Enough picking.
Your spreadsheet shows quite clearly that to Sell & buy will involve costs of $28.5k. (Yikes - that's almost 10% of the asset!)
As DaleGG has said on many occasions, that's a lot of wealth to give away.
Yet MannyB is right also, if you are going to buy and sell, you wouldn't put the equity into the IP, you would put it into the new PPOR. Unless your friend has just got a whopping big inheritance to buy their dream home outright, that is where you would put it.
Another thing to consider (maybe you can build it into your spreadsheet) is the qn of what is the opportunity cost of the equity in the old home _not_ being in the new PPOR, and reducing non-deductable debt.

I actually went down this path in Feb this year, and I had been thinking of it for months. If doing it again, I would try investigating options of increasing the loan balance months before you (your friend) does anything with it. Maybe one of Steve Navra's cashbonds, or even if it was just to buy some high yielding blue chip stocks that the income from that can be directed to the new PPOR mortgage. Anyhting that legitimately increases the debt and (tax-deductability) on the old home.

Just some thoughts, hope it helps.

Luke

 

[geoffw]

Luke,

Yes, in going through this with my friend, I did find similar holes. My apologies for posting with so many errors.

And I did make an assumption that one was buying another IP to the same value and condition as the old PPOR. That would probably mean that depreciation and other expenses would come out roughly the same under both scenarios.

you don't have anything listed as tax claimable (payable) for the hold strategy.

Yes, I wasn't sure if I could claim tax if the original loan was PPOR. It can be adjusted. But I think that I haven't calculated tax liability in that scenario anyway.

Under Net income I think the equation should be C17+ C18, and likewise for D17+D18, not minus

Yes, I realised that today.

Michael Yardney said in another thread

Iv'e expermented with lots of excel spreadseets and even wrote a comrehensive one, but there is no doubt in my mind that the best software software available in Jan Somers PIA

Which I think is equally applicable here. My simple model is just attempting to dtermine whether it's automatically better to sell the old PPOR, or the keep the old PPOR, or what. I suspect that the answer would depend on various circumstances- and if anyone was contemplating going one way or the other, they should go into the different scenarios carefully, and not just assume that one is better than the other.

Something else which would make a difference in the ACT is that because stamp duty is on a lease, and not on a purchase, it is 100% deductible in the first year. That brings down purchase expenses.

Thanks for the input.