Structuring new IP purchase: ownership and loan questions

[Kotrab]

Hi

(Please direct me to other threads if these questions have already been answered.)

We own our PPOR outright, and currently have one investment property in 100% offset ($441K still notionally owing), with approx. $50K in an interest-earning account. We are about to settle on a second investment property (purchase price $650K; 10% deposit paid; balance owing $585K plus stamp duty, fees etc.). I have a couple of questions:

1. Are there any advantanges/disadvantages in paying off the mortgage on the first property using the offset funds? Or are there good reasons for keeping that mortgage open, and either leave it in 100% offset or splitting the offset funds between the two properties?

Possibly relevant to the answer is the fact that we own the first property as joint tenants, but are thinking of buying the second property as tenants in common with unequal shares -- possibly 80-20 in my wife's favour. My wife's income is approx. $160K pa, while mine is approx. $20K pa (not including rental income on the current or future IPs). I am late 50s and semi-retired; my wife is early 50s and fully employed, probably for another 10-15 years.

2. Would it be better for us to buy the second property as common tenants with unequal shares, keep both loans open, and then shift the offset funds from one to the other account depending on any changes in circumstances? If so, what factors should we consider when deciding where the offset funds should be?

Many thanks for any help you can offer!

 

[superAndrew]

Hi Kotrab

Welcome to the forum.

Hi
1. Are there any advantanges/disadvantages in paying off the mortgage on the first property using the offset funds? Or are there good reasons for keeping that mortgage open, and either leave it in 100% offset or splitting the offset funds between the two properties?

It's better to leave it open so you can access the equity if you need to.

Andrew

 

[Greg Reid]

A good position to be in.
With your different income levels, I hope the $50k is in your sole name.
Why would you not purchase the second IP solely in your wife's name using borrowed funds at least to 80% if not higher?
This presumes it will be negatively geared for some years. If it is positively geared or close to it from day 1, then purchase in your name but having both on mortgage for servicing.

One component of your strategy should be to look to minimise tax, after all it is to your benefit not to pay more tax than you legally need to. Depending on your time frame, you could look to refinance your existing IP to pull out the 10% to 20% funds to settle the new IP then borrow the rest from another lender.

I would look to leave the offset where it is as it accessible at any time and you share the interest cost reduction, however that also depends on the numbers of the second IP as to which is the best mix of ownership and tax benefit. It also gives you choice, now and in the future if circumstances change.
Good luck with it.

 

[Paul@PFI]

Well worth contemplating strategies that can assist lower taxation. Based on your ages, income etc this seems like it is something you should be considering.

Ever considered using the offset cash and TD to contribute to super and access very low tax rates on positive geared property and avoiding high personal tax rates. eg : Use cash to go to super (SMSF) and it invests. If there isnt enough $$ then a strategy where you onlend extra $$ to fund can also work. This strategy would refresh personal deductions too. Less personal tax a further bonus.

Tax rates:
Your marginal tax rate 39% v's Super fund 15%
Super fund tax rate once a pre-retirement pension stragtegy is considered could be 0.00%. No CGT etc.

Happy to discuss : Email below.

 

[Terry_w]

There are several things to consider.

1. Flexibility
2. Asset protection
3. tax
4. super strategies

Having large sums of cash means you can move things around to increase asset protection, save tax and increase income.