To buy or not to buy - that is the question

[mins]

AIM: Purchase an investment property up to $150,000 in Regional NSW. Rental income approx $180-$190 per week min. Borrow approx 90%. Pay costs upfront.

ISSUE: My taxable income is quite high and I have very few deductions. Understand that negative gearing should be a better alternative for tax

SITUATION:
Married 1 child - husband doesn't work.
Income: Approx $200,000p.a. - mainly commission based.
PPOR: $1400p/m in payments bank valued at $280,000 owe $235,000.
OTHER PPOR: Helped my brother buy a house which he is living in. Payments approx $1600p/m. Bought in Dec 2012 for $347,000 owe $312,000. He is making the full payment on this loan. Used my cash savings to assist him with the deposit which he is paying back to me interest free. I assume this property is NOT tax deductible for me given my brother is living in it.

My only other debts are my husband car loan of $750 per month and a credit card which I usually clear in full each month.

I know it is using up all my available equity and I know I can afford more in payments etc. At this stage I would prefer cheaper properties that can pay themselves off over time given it would be my first proper investment property and I want to wet my feet without jumping boots and all in so to speak.

Just not sure if it is the right thing to do from a tax perspective... love to hear other peoples viewpoints. Thanks in advance.

 

[Aaron_C]

Would be a good step to first work out how much you can afford to borrow in the eyes of a lender (since you are commission based).

As for your brother's property, you can always still list it as an investment property (since it is not a PPOR) but it may be hard to rely on the rental income because there isn't any per se.

Buying 'cheaper' properties might be a good option. Wouldn't necessarily 'pay themselves off over time' since the recommended approach is interest-only repayments to maximise your cashflow and maximise tax deductions.

 

[bennytee]

Dont buy

Generally if you are buying in a regional area you should aim to get a much higher rental yield than 6.24% (using the figures 180 rent on a 150K purchase price) after expenses you would be negatively geared.
I dont see the upside of your plan.
You could get the same rental yields (possibly higher) in the outer suburbs of some of our capital cities where there is a better chance of growth and rising rents so your net worth and cashflow will increase over time.

 

[Terry_w]

3 questions
1. Why buy in regional NSW? What are you hoping to achieve?
2. Is your name on title to your brother’s property? If so why aren’t you claiming your expenses and declaring a rent?
3. Do you income split with your husband? Have you sought some tax advice on this?

 

[ozmale42]

As for your brother's property, you can always still list it as an investment property (since it is not a PPOR) but it may be hard to rely on the rental income because there isn't any per se.

I'd say there'd be nothing deductible for you on the 2nd property given that your brother is paying the interest charges in full and the deposit loan is interest free. Even if you could successfully argue that the interest payments he makes are, in essence, rent income you'd then have to show that the rental arrangement was at arms length in order for you to deduct other holding costs, which you should be quite entitled to do.

Regardless , if the property's in your name you would have a CGT issue to deal with upon sale as no main residence exemption would apply

 

[Aaron_C]

I'd say there'd be nothing deductible for you on the 2nd property given that your brother is paying the interest charges in full and the deposit loan is interest free. Even if you could successfully argue that the interest payments he makes are, in essence, rent income you'd then have to show that the rental arrangement was at arms length in order for you to deduct other holding costs, which you should be quite entitled to do.

I am talking from a bank's perspective, not the ATO's. I don't think the OP ever suggested (nor would I) of claiming it as an IP for tax purposes.

 

[ozmale42]

I am talking from a bank's perspective, not the ATO's. I don't think the OP ever suggested (nor would I) of claiming it as an IP for tax purposes.

Yes, but from her earlier post I think the OP was looking at things from a tax perspective and is why I thought tax is what you were referring to...All good.