Structuring for tax - is there a better way?

[BrisKate]

Love the advice on these forums Looking for the most tax-effective way of buying new PPOR and turning current PPOR into IP2.

IP1: value 210K, loan 219K, rent 270/wk; (just settled)
PPOR: value 365K+, loan 155K, will rent for 350+/wk;
New PPOR: 410K max. (incl costs).

Will need to refinance both loans in Jan, likely with diff lender. IP1 is IO var, PPOR is P&I var. No exit fees.

When I buy new PPOR, existing PPOR loan of 155K will go IO & become tax-deductible, though I’ll want to draw about 200K equity (via LOC?) for deposit on new PPOR (to keep total LVR just <80%).

Is there any way around being stuck with 155K deductible debt and a 200K non-deductible debt on IP2? Want to keep PPOR for CG. Selling to family member & buying back would cost about 30K. Doubt it’s worth it. Would rather not sell and re-purchase elsewhere. Also have shares worth 29K, margin loan of 8K. Any suggestions gratefully received.

 

[BayView]

Is there any way around being stuck with 155K deductible debt and a 200K non-deductible debt on IP2?

short answer - no.

The bright side is this; you will be the proud owner (controller) of 3 properties.

This is a fairly significant "footprint" with which to accelerate your future investment plans.

The long term view I reckon is to use the increasing equity you will no doubt get to use on more investments.

These will hopefully provide income from rents and tax returns which you will use to reduce the non-deductible debt you will have to incur to buy your next PPoR.

it's all good.

 

[Rolf Latham]

u sound like a good candidate for a debt recycle strategy so you can get that New bad debt converted to deductible debt asap

ta
rolf

 

[BrisKate]

Thanks Marc & Rolf. Following Corsa’s post on debt recycling ... http://www.somersoft.com/forums/showthread.php?t=26532 ... do you mean I should pay the non-deductible portion of IP2 debt (IO) with a LOC? Wouldn’t I need to wait until I have more equity to make this work?

If my numbers are accurate, I’m not sure how I could squeeze enough out of it (thinking 200K @ 6.3%, for eg, is $12,600/yr) ... Would this rely on CG across all 3 properties rising by this amt each yr? Would I need to have new valuations done annually? Have I interpreted this correctly?

 

[BayView]

Thanks Marc & Rolf. Following Corsa’s post on debt recycling ... http://www.somersoft.com/forums/showthread.php?t=26532 ... do you mean I should pay the non-deductible portion of IP2 debt (IO) with a LOC? Wouldn’t I need to wait until I have more equity to make this work?

If my numbers are accurate, I’m not sure how I could squeeze enough out of it (thinking 200K @ 6.3%, for eg, is $12,600/yr) ... Would this rely on CG across all 3 properties rising by this amt each yr? Would I need to have new valuations done annually? Have I interpreted this correctly?

To me, using all the rent to pay down your non-deductible debt on the PPoR (either through an offset or straight debt reduction) while continuing to allow the deductible debt on the IP to accumulate is fraught with danger.

Why? As I keep saying; life happens, and the worst thing that can happen is a forced sale (or sales) which would leave you with more owed than you sell for.

In the case of a forced sale, the Banks would probably ask for the IP loan to be paid - or worse; the PPoR loan, or worse still - both loans.

As well as this; the area of capitalising deductible interest while paying down only non-deductible is still a bit grey.

In my view, address each loan commitment as it should be - pay the required interest (and principal if required) each month and work on reducing the non-deductible debt as you are able.

You can still channel all income (rent and earned income) into your personal accounts to reduce the non-deuctible loan, and then pay the IP loan each month from here. This is what we did.

You can also do it in a way whereby you lve off the credit card so the cash stays in the personal account as long as possible and then pay out the card each month to avoid interest. You minimise interest on the personal account, and maximise points on your card this way.

Finally, (I'll get shot down here for this) if you cannot pay down your personal debt without resorting to "debt recycling", then I'd suggest you are over-committed and in a dangerous financial environment anyway.

Many have said you never pay down your investment debt because it eats into your returns on your investment.

This is true, however, my view is that I'd rather cop a lesser ROI, and IRR, than be cashstrapped and stressed.

The end result if you pay down a bit of debt is that you accelerate your equity position much faster (other than waiting for cap growth to do it), you can then re-invest much sooner, and can probably make up for the loss of ROI on the next investment.

And repeat.

This is what we have always done, and what happens is you reach a point where the upward curve of your wealth base starts to become exponential.

Your increasing property values are going up by a % each year and the more property you have, the bigger the actual dollar amount attached to that % there will be.

Eventually, there will come a point where to reduce debt - unless it is in large chunks - will become pointless as the wealth base will increase at a much higher rate than your normal debt reduction amounts might be, but in the early days, the wealth base is smaller, so the impact of increasing equity through debt reduction is more noticeable.

 

[BrisKate]

Many thanks for the advice.

 

[Rolf Latham]

Hi Marc

A properly constructed recycle strategy has a debt reduction component to it as well, just with your flexibility in mind, and not the lenders'.

Its just that if the strategy is properly implemented in a case such as this, you can be debt free much sooner and have many more choices.

ta
rolf

 

[BayView]

Hi Marc

A properly constructed recycle strategy has a debt reduction component to it as well, just with your flexibility in mind, and not the lenders'.

Its just that if the strategy is properly implemented in a case such as this, you can be debt free much sooner and have many more choices.

ta
rolf

I agree Rolf.

I guess my mindset is one of the "fartherly-must protect the young" view.

Unfortunately - as you've no doubt seen a few times - the control needed to stick to this strategy is beyond some folks, and therefore it becomes dangerous for them.

I would LOVE to see every home owner with this strategy and one or two IP's on the go.

 

[Rolf Latham]

yeah Marc

the draw of the doo dad is very strong .................

The culture I came from is that you buy a new car every year, and have a nice holiday once a year.

But then, 70 % of people where I come from rent, so one needs to validate your financial life somehow

ta
rolf