Starting a portfolio

[Undervalued]

I am a relatively recent arrival to Australia and I am looking to start my property portfolio with a purchase of an investment property and would welcome some advice.
I am looking to fund the property from my redraw balance on my PPOR (this is sitting in my loan right now effectively as an offset balance, but not in a separate account, and does not require an equity release), this is about $250k, and a new loan of about $400k.
My wife is currently at home looking after our #1 and as the property will likely initially be negatively geared, I want to make sure I get attributed as much of the tax loss as possible. Our PPOR and mortgage for the PPOR are in our joint names.

This is the first property of a number we would look to buy and own over time as a retirement strategy. We are unlikely to get a letting agent to manage the property as we would look to start with something in our area.

From a cost perspective, I would like to come out so all of the below are attributed solely to me:
1) The balance taken out of the PPOR mortgage redraw is tax deductible.
2) The full interest cost of the new loan is tax deductible.
3) Costs of managing the property are tax deductible (inspections, repairs, accounting, any staff etc).
4) Costs associated with the property are tax deductible (strata fees, water, council tax).

I am guessing (1) I may need to split with my wife as the PPOR mortgage is in our joint names, and (3) is okay as long as I run this as a rental business, rather than a rental property. Is that correct?

Given that my intention is to expand my property portfolio over time, and that I would not be using a lettings agent, I expect that I am okay on (3) being tax deductible?

Should I be thinking about structuring this as a business (ABN registration etc) from Day 1? Even to the point of how / in what name I apply for the additional loan? I can't see this working as the 'business' would not have any loan serviceabiilty capacity and I can't attribute my personal income to a company in any way I can think of.

Are there any other obvious gotchas I am missing?

I should add - the Bank is asking for my wife to act as a guarantor for the 400k loan. Does this impact tax deductability?

 

[Jamie M]

Hiya

You can't redraw those funds from the PPOR loan to fund an IP - you'll lose tax deductibility as the loan becomes mixed up with personal/investment debt.

Instead - it needs to be set up as a separate loan account used only for investment.

Cheers

Jamie

 

[Undervalued]

Thanks Jamie. I will pick that up with my Bank. I should then be able to manage it as a top-up to my existing mortgage.

Am I correct in thinking there is no avoiding that only half the interest on this tranche is 'mine' for tax deduction and the other half is my wife's?

 

[Terry_w]

I am a relatively recent arrival to Australia and I am looking to start my property portfolio with a purchase of an investment property and would welcome some advice.
I am looking to fund the property from my redraw balance on my PPOR (this is sitting in my loan right now effectively as an offset balance, but not in a separate account, and does not require an equity release), this is about $250k, and a new loan of about $400k.
My wife is currently at home looking after our #1 and as the property will likely initially be negatively geared, I want to make sure I get attributed as much of the tax loss as possible. Our PPOR and mortgage for the PPOR are in our joint names.

This is the first property of a number we would look to buy and own over time as a retirement strategy. We are unlikely to get a letting agent to manage the property as we would look to start with something in our area.

From a cost perspective, I would like to come out so all of the below are attributed solely to me:
1) The balance taken out of the PPOR mortgage redraw is tax deductible.
2) The full interest cost of the new loan is tax deductible.
3) Costs of managing the property are tax deductible (inspections, repairs, accounting, any staff etc).
4) Costs associated with the property are tax deductible (strata fees, water, council tax).

I am guessing (1) I may need to split with my wife as the PPOR mortgage is in our joint names, and (3) is okay as long as I run this as a rental business, rather than a rental property. Is that correct?

Given that my intention is to expand my property portfolio over time, and that I would not be using a lettings agent, I expect that I am okay on (3) being tax deductible?

Should I be thinking about structuring this as a business (ABN registration etc) from Day 1? Even to the point of how / in what name I apply for the additional loan? I can't see this working as the 'business' would not have any loan serviceabiilty capacity and I can't attribute my personal income to a company in any way I can think of.

Are there any other obvious gotchas I am missing?

I should add - the Bank is asking for my wife to act as a guarantor for the 400k loan. Does this impact tax deductability?

Don't do anything before getting tax advice as you are about to make 2 serious mistakes...3 probably!

I have covered this topic in my newsletters.

 

[Undervalued]

Your bait has been taken, Terry. Dropped you a PM.

 

[Undervalued]

Jamie

In my reading of TR 2000/2, redraw taken out form PPOR mortgage loan for IP purposes is tax deductible although with the on-going requirement to apportion future interest expense and any repayments between tax deductible and non-tax deductible. Could you please clarify?

Terry

I just realised your account does not allow PM's. Will follow up next week through the contact details on your site. I am reading through the 'property bible' you co-authored, and the structure options in particular. I haven't spotted the 2-3 serious mistakes in my own approach which probably means I have learnt little and am wasting my time in reading!
I am still leaning towards keeping it simple as this way I get negative gearing now, and a reduced CGT base later if I choose to sell. If there were an option where distribution rates of a trust could be varied over time, that would be ideal (distribute losses to higher income earner now, in future distribute profits to lowest income earner) but even in the case where a structure could be made to do this, it seems like the sort of thing the ATO would extinguish pretty quickly.

Regards

 

[D.T.]

The apportion part is right but that's such a pain in the *** to do that you simply wouldn't bother. Spend 5 minutes reading about loan structure or calling a broker and avoid it altogether

 

[Paul@PFI]

Don't do anything before getting tax advice as you are about to make 2 serious mistakes...3 probably!

Structure - What seems fine and gives a great tax outcome today may not work in future when you are stuck with 100% of the capital gain. Flexibility in the future may be a benefit.

Loan - The bank seem to have it sorted from your comments. Guarantor is fine. However this same arrangement may not work for the structure issues. I wouldn't rush. Hope you are using a broker.

Not a business. No ABN. Its not an enterprise. Signs of over thinking here. You could get it really wrong. Its like self medicating. It can hurt you.

I would also be considering the offset. Repay your PPOR and the a new loan for the new IP.

All above are indicators of the need for personalised tax advice.

 

[joanmc]

Hi Undervalued. As someone who has a fair sized portfolio I would advise you talking to one of the people here who has offered advice. Your stated goal is to build a portfolio for your retirement and that is fantastic but you don't know what you don't know. We made many mistakes along the way that have seriously impacted what we have achieved and probably set us back at least 10 years!
I can honestly say that I wish I had taken the time to get advice when we first started but we didn't even know about sites like this. You have many decades of accumulated wisdom here.
Please take it and good luck with your journey.