Turning primary place of residence into an investment

[BlueEyes]

Hi,

Hopefully I will get a few ideas from this forum as to where to go and what to do as it appears we have a difficult decision ahead of us. We have recently moved from Perth to Sydney for lifestyle and a change not for work. My wife was only 50% on board so we rented our house out - she has an emotional attachment to it as we built it etc and loves it. The house is worth around $900k with a loan of $130k (this is a line of credit which we maxed out prior to listing the house for rent). The rent is $795pw which is fine, lots of taxed income from it but we need to access the equity in this home to build a new home in Sydney. How on earth can we do this without selling it? Is there a way that is allowable? It is becoming very restrictive on our lives as we have seen a block of land that is expensive as hell but we know if we build on it we can make another $300k in equity straight away. Any input is greatly appreciated.

 

[GreenTreeFrog]

Get another LOC set up against the equity in the $900k home.

Paying tax means you are making money so that is a good thing!

Did you get a depreciation schedule done on the $900k home? That should ease the tax liability on the income somewhat.

 

[BlueEyes]

I have just emailed a contact in Perth to see if they can recommend a decent quantity surveyor for this purpose, if anyone here knows one in Perth's northern suburbs that would be great. Would extending the LOC and claiming it as a tax deduction be legal seeing as how the funds I would be extracting would be for a primary place of residence? Thanks for the reply.

 

[Propertunity]

- she has an emotional attachment to it as we built it etc and loves it.

That is perfectly understandable

The house is worth around $900k with a loan of $130k (this is a line of credit which we maxed out prior to listing the house for rent).

What did you use the $130K for? If it was for personal expenses, it is not tax deductible. Sounds like you have a $900K paid off PPOR with an LOC of $130K used to get you established in SYD

The rent is $795pw which is fine, lots of taxed income from it

Actually it is only 4.6% gross yield - just OK - not great

but we need to access the equity in this home to build a new home in Sydney. How on earth can we do this without selling it? Is there a way that is allowable?

Get a bigger LOC against it as GTF suggested. Or refinance a large chuck of cash out of it. But remember the loan you get will not be tax ded. because it is being used for personal use - your own home in SYD.

It is becoming very restrictive on our lives as we have seen a block of land that is expensive as hell but we know if we build on it we can make another $300k in equity straight away.

That statement is ringing alarm bells for me It may be right - but make sure you really know this to be the case.

 

[BlueEyes]

Thanks Propertunity.
Okay to respond to some of the questions you have in regards to our situation.

"What did you use the $130K for? If it was for personal expenses, it is not tax deductible. Sounds like you have a $900K paid off PPOR with an LOC of $130K used to get you established in SYD"

That is correct in regards to the $130k. It was done to release as much in funds from our PPOR as possible prior to it being let which in opinion (only an opinion) should be allowable as a tax deduction. Isn't that the reason they allowed a tax deduction so that properties are available for people to rent?

"Actually it is only 4.6% gross yield - just OK - not great"

True but it is not a bad income considering the size of the loan. On top of our other income producing investments while we try to get established in a new state.

"Get a bigger LOC against it as GTF suggested. Or refinance a large chuck of cash out of it. But remember the loan you get will not be tax ded. because it is being used for personal use - your own home in SYD."

This is the part I dislike the most. If this is the case we would be so much better off selling the house in Perth, building the dream home with no mortgage on a PPOR then borrow against the equity to end up with what I want to do in this situation in regards to large loan on investment, no loan on PPOR. Sounds like the government has set itself up to ensure it snares lots of Stamp Duty in making you have to go through the whole sell and buy scenario to get back to the same position. Does that make sense or am I missing something?

"That statement is ringing alarm bells for me It may be right - but make sure you really know this to be the case."

I have done a lot of research on the area and there is high demand and not much if anything available. Old painted renos are going for $1.7+ and we have found land for $1.0 with fantastic close ocean views and can build a great house for $450k. We have the funds in the bank to pay cash for the land but want to free up other monies without having non deductible loans. Not being greedy just would like to have it set up as best possible.

Thanks a lot for you responses so far.

 

[Rolf Latham]

Hiya

Can you look at doing a "sale" of some or all of the property to one of you or a unit trust, thus converting the debt in a round about way to being deductible

The numbers may work in your favour but depends on a few things, mainly taxable income position and if you are going to hold that property long long term.

It looks like its not a great time to be a seller in the WA market at the moment so such a strategy may be benefical from that point also.

ta
rolf

 

[BlueEyes]

Hi Rolf, thanks for the reply. We do have Trust setup (just recently) but with the wife and I being Trustees are we able to buy a property from ourselves? Doesn't sound like it but we are into gray areas in my knowledge base there.

Regards

Steve

 

[BlueEyes]

Sorry, also if we buy it from ourselves we will no doubt have to pay the stamp duty on the purchase wont we?

 

[Propertunity]

That is correct in regards to the $130k. It was done to release as much in funds from our PPOR as possible prior to it being let which in opinion (only an opinion) should be allowable as a tax deduction.

No - the tax ded. or otherwise goes to the purpose of the loan. You can't just load up a paid off property with debt and get a tax ded. for the interest UNLESS you use the loan monies for other investments.

Isn't that the reason they allowed a tax deduction so that properties are available for people to rent?

No - they allow a tax ded. for interest on monies borrowed to purchase & run an investment property for people to rent.

 

[BlueEyes]

I understand exactly what you are saying Propertunity in regards to the purpose of the loan or money but it seems annoying that we will end up with the same result of a paid off PPOR and an investment property with a high LVR if we sell the property and pay all of the powers that be, namely agents and government. Do you see what I am saying? Removing all of the equity as a tax deductible investment from the property in Perth and paying off a PPOR in Sydney is going to give the same result if we are going to continue property investment after the PPOR is lived in. It just seems like shuffling the money with middle men being paid for nothing.

 

[BlueEyes]

Would it be the same scenario if I accessed equity from a factory/warehouse that I own? Would that be looked at differently as you cannot live in a factory or will it still be looked at as purpose the money is used for once it has been taken away from the factory meaning the interest once again cannot be tax deductible?

 

[Propertunity]

Do you see what I am saying? Removing all of the equity as a tax deductible investment from the property in Perth and paying off a PPOR in Sydney is going to give the same result if we are going to continue property investment after the PPOR is lived in.

Yes, I see & saw, what you are saying - you end up with the same cash / debt position BUT a completely different TAX position.

 

[Propertunity]

Would it be the same scenario if I accessed equity from a factory/warehouse that I own?

Yep.

Would that be looked at differently as you cannot live in a factory or will it still be looked at as purpose the money is used for once it has been taken away from the factory

Yep - purpose test

meaning the interest once again cannot be tax deductible?

Correct.

You need to restructure for tax purposes. Short term pain - long term gain. Unless wifey decides she wants to go back to Perth to live in the dream house. Then you get an IP in SYD with tax ded.

 

[BlueEyes]

Thanks for your input Propertunity I am still learning the ropes in regard to allowable tax scenarios etc and I now fully understand what you have explained even though it still seems somewhat frustrating. I can see why it is not allowable as the mega rich would continually use this strategy to have all of their personal wealth (exhumed from investments) tax deductible. Oh well extending the LOC in a non tax deductible way may be the go short term. Hopefully the wife will love the new house and we can sell Perth Just on the subject of home building, the builder has just sent me an email saying the house will be $500-$550k to build now, not the original $400-$450k grrrrrr.

 

[Propertunity]

....the builder has just sent me an email saying the house will be $500-$550k to build now, not the original $400-$450k grrrrrr.

There goes $100K of the $300K instant equity you planned before you even start the foundations

 

[BlueEyes]

Its not the equity I was worried about.

 

[handyandy]

Just on the subject of home building, the builder has just sent me an email saying the house will be $500-$550k to build now, not the original $400-$450k grrrrrr.

The increase is to reflect the view as his workers will now be distracted by the view and work slower thus taking longer and charging more.

At least that what I put it down to. As much as possible we try and get quotes on the phone before they come on site as invariably you get a 'view' price ones they see the site. Very frustrating.

Cheers

 

[BlueEyes]

Hahahaha funny you should say that Handyandy we thought the same thing. They must think expensive land, ocean views hang on a minute we can charge this guy more for this.