Timing of selling investment property.

[Ogre]

Hello
Hoping someone has been in a similar situation and can shed some light on the best option.
My wife and myself bought an investment property around 4 years ago for $320k and is now worth around $400k. We are planning on having kids next year so ideally I want to sell the place before we go down to 1 wage. We can afford the loan while there is a tenant but I am mindful of the financial stress it may cause if there is any lapses in a tenant change over, plus also losing out on any negative gearing on my wife's share of the property while she is not earning a normal wage. So basically I am tossing up between two options:
a.) Sell the place the financial year after we have kids to reduce to capital gains on my wife's half as she will not be working. The issue with this is from the online calculators it appears that it would seem to wipe out any family tax benefit we would receive.
b.) Sell the house prior to having kids and cop the capital gains bill.

Has anyone else been in a similar situation?

 

[Terry_w]

Hello
Hoping someone has been in a similar situation and can shed some light on the best option.
My wife and myself bought an investment property around 4 years ago for $320k and is now worth around $400k. We are planning on having kids next year so ideally I want to sell the place before we go down to 1 wage. We can afford the loan while there is a tenant but I am mindful of the financial stress it may cause if there is any lapses in a tenant change over, plus also losing out on any negative gearing on my wife's share of the property while she is not earning a normal wage. So basically I am tossing up between two options:
a.) Sell the place the financial year after we have kids to reduce to capital gains on my wife's half as she will not be working. The issue with this is from the online calculators it appears that it would seem to wipe out any family tax benefit we would receive.
b.) Sell the house prior to having kids and cop the capital gains bill.

Has anyone else been in a similar situation?

Which one puts more money in your pocket?

 

[wylie]

Is the house costing you much to hold?

 

[GreyGhost]

1.May be deemed a scheme by the ato, but could transfer your wife's share of the property to you, thus maintaining the gearing. Usually we argue it is for asset protection and done the other way around with mr transferring his share to mrs.

2. Have you weighed up putting the loan on interest only? How much will this reduce your commitments by per month?

3. Have you considered a Payg variation if the property is negatively geared as you say?

Combination of the above may allow you to keep the property more long term... But you need to be comfortable with any risk.

 

[Paul@PFI]

You are really contemplating a financial decision, not a property decision. First thing is to consolidate and address facts.

What is the cashflow issue with the IP ? EXACTLY how much a week is the CF -/+ ?
Can you go to IO for a few years ?
Are you claiming depn and CA ?
Adjust the CF for the extra tax refund YOU get. Ignore your wife's. Is it still CF +/ - ?
Can you seek a new tenant and a better lease that diminishes risk ?

I cant speak for WA vacancy rates but a local PM can. Seek their view on the market and recent changes. They may have 20 tenants lined up. If so your fears may be unfounded. However they may indicate that new leases will be written at a lower price. Take it all on board. And if the cashflow issues are trivial then why worry. I wouldn't sell a property that isn't a dramatic drain on cash. Retaining the IP may be preferable to loss of the ability to generate wealth and losing FTB because you take a small CGT profit.

Tip : LL insurance may be a good idea to protect against a bad tenant if you have concern about periods of no rent. That small extra deductible cost is a better cost than agent selling costs !!

Your wife may cease working for a few years... She may go PT and earn tax free income or return to FT at some point and have a large accumulated tax loss. Losses aren't lost. They are just deferred.

 

[Ogre]

Thanks for your advice and opinions everyone, to answer some of the questions

Which one puts more money in your pocket?

In the short term week to week we would be better of selling.

Is the house costing you much to hold?

It is close to cash flow neutral at the moment with interest rates so low

1.May be deemed a scheme by the ato, but could transfer your wife's share of the property to you, thus maintaining the gearing. Usually we argue it is for asset protection and done the other way around with mr transferring his share to mrs.

2. Have you weighed up putting the loan on interest only? How much will this reduce your commitments by per month?

3. Have you considered a Payg variation if the property is negatively geared as you say?

Combination of the above may allow you to keep the property more long term... But you need to be comfortable with any risk.

1. Could be an option, I may need to look further into this - thanks
2. Loan is already on interest only
3. We used to do a PAYG variation when we first bought the property but we found in our current situation it worked out better getting a bigger return at the end of the financial year.

You are really contemplating a financial decision, not a property decision. First thing is to consolidate and address facts.

What is the cashflow issue with the IP ? EXACTLY how much a week is the CF -/+ ?
Can you go to IO for a few years ?
Are you claiming depn and CA ?
Adjust the CF for the extra tax refund YOU get. Ignore your wife's. Is it still CF +/ - ?
Can you seek a new tenant and a better lease that diminishes risk ?

I cant speak for WA vacancy rates but a local PM can. Seek their view on the market and recent changes. They may have 20 tenants lined up. If so your fears may be unfounded. However they may indicate that new leases will be written at a lower price. Take it all on board. And if the cashflow issues are trivial then why worry. I wouldn't sell a property that isn't a dramatic drain on cash. Retaining the IP may be preferable to loss of the ability to generate wealth and losing FTB because you take a small CGT profit.

Tip : LL insurance may be a good idea to protect against a bad tenant if you have concern about periods of no rent. That small extra deductible cost is a better cost than agent selling costs !!

Your wife may cease working for a few years... She may go PT and earn tax free income or return to FT at some point and have a large accumulated tax loss. Losses aren't lost. They are just deferred.

* Per week at the moment the property is about $15 negative
* The investment is interest only, the primary residence we were planning on going IO for a few years.
* Yes we are claiming depreciation
* I would need to work out exact numbers but we would be more cashflow negative keeping the investment property.
* The tenant we have at the moment is fine and has been there for about 18 months.
* WA vacancy rates have increased a fair bit over the past 12 months.
* We have LL insurance

From my calculations using Centrelink's online calculator the effects of having the IP and the FTB.
Selling before going onto FTB - $211 f/night
Holding IP while on FTB - $77 f/night
Selling while on FTB - $0

I guess I need to weigh up the potential gains per year and if that is likely to be higher than any FTB or how much cash negative we would be and how that would effect our way of life. I know holding onto the property long term is the most sensible option but the plan when initially buying it was for the purpose of reducing the mortgage on our primary residence once we have kids.

 

[Paul@PFI]

* Per week at the moment the property is about $15 negative
* The investment is interest only, the primary residence we were planning on going IO for a few years.
* Yes we are claiming depreciation
* I would need to work out exact numbers but we would be more cashflow negative keeping the investment property.
* The tenant we have at the moment is fine and has been there for about 18 months.
* WA vacancy rates have increased a fair bit over the past 12 months.
* We have LL insurance

From my calculations using Centrelink's online calculator the effects of having the IP and the FTB.
Selling before going onto FTB - $211 f/night
Holding IP while on FTB - $77 f/night
Selling while on FTB - $0

I guess I need to weigh up the potential gains per year and if that is likely to be higher than any FTB or how much cash negative we would be and how that would effect our way of life. I know holding onto the property long term is the most sensible option but the plan when initially buying it was for the purpose of reducing the mortgage on our primary residence once we have kids.

FTB is calculated based on "Separate Net Income. Its taxable income PLUS the negative rental losses (ie they are ignored). I dont agree with your FTB estimates. Something is wrong. No way you would get extra $134FN FTB by selling for the numbers you mention. If the property is costing you $15 a week that trivial and likely of zero impact to FTB. Selling harms FTB. So why do it if its costing $15 a week before your tax refund is calculated ??

Part B is income tested and so a sale could end Part A and Part B entitlement.

Check your calcs - FTB Part A is $177 FN. What about Part B ??

Use the PIA software free trial in somersoft.com main page. Model a 10 year scenario with a modest growth of 2.5% and the rental income and costs from last year into the projection. It will confirm the benefits of holding. When your kid is 10 the property may be worth $515K....For $15 a week short term. Likely to become small CF+ soon ?

When your kid is 20 its worth $655K...And you still haven't paid any tax. And unless rents are really positive geared I don't see a major impact on FTB.