We bought our first house by cash…Need help from accountants and brokers!

Discussion in 'Property Finance' started by kai41314, 21st Sep, 2012.

  1. kai41314

    kai41314 Member

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    Hi everyone,

    We are new migrants and bought our first house in Melbourne by cash one year ago. Now we are thinking to buy another bigger house (for owner occupied) and turn our first house to an investment property.

    Our first house is worth about $330K now and our budget for the second house is about $550K. We do not have the 20% deposit of the second house so we are thinking to refinance our first house.

    Our current plan:

    Loan 1 (80% of 330K - Interest Only with offset account) = $264K

    Loan 2 (80% of 550K - Interest Only with offset account) = $440K

    20% deposit and stamp duty of the second house = $140K

    The $140K will come from loan 1 and we would like to put the remaining $124K from loan 1 into the offset account of loan 2.

    Are the interests of the $124K tax deductible? We have asked an accountant and a broker and got different answers. The account said no because we bought the first house by cash but the broker said they are tax deductible.

    Not sure if we should post this here or in the "Accounting and Tax" sub-forum.

    In addition, if you have a better plan, please let us know. Thanks for any help you can give.
     
  2. Aaron_C

    Aaron_C Finance Broker

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    Accountant is right as the purpose determines deductibility.
     
  3. MattKenworthy

    MattKenworthy Member

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    I'd also be looking at using a different broker if I were you - one that will give you the right answers, rather than the answer you were hoping for.
     
  4. Elstupido

    Elstupido Member

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    I was in similar situation as you are now.

    Migrated to Australia and bought property on cash. Lost the opportunity to buy several properties.

    Why don't you sell the current house and use the proceeds to purchase a new PPOR and several IPs (not just one)?

    So, you can get 100% loan interest deduction on IPs?

    Unless, your current house is in a good area and increasing in value, you might sell and no need to pay cgt.
     
  5. Thann

    Thann Member

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    Probably the best thing to do would be to sell the current property, and use the funds as deposit for new PPOR. Then setup an Offset account linked to the new loan. Dump all savings into this account (not any funds from borrowings).

    If you want to keep the current property, you might be able to sell to a family member (depending on which names are on the title).

    (I'm still learning, so any comments from the experts are welcome :) )
     
  6. kum yin lau

    kum yin lau Member

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    Hi, this is what your 'plan' really is:
    1) Borrow 704K offset by 114K loan amt = 580K
    2) Current house becomes a rental say @4% yield = 13000 p.a.

    I don't think you need to pay tax on interest offset by the 114K but you pay interest on 580K = $34800 + rates/insurance etc on new PPOR

    None of your loans are tax deductible. So rental income increases your income meaning you pay more tax.

    So in reality you have to fork out about $500 per week to live in a bigger, flashier house.

    What do you think the people on this forum will say about your 'plan'?

    KY
     
  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker/strategist

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    * Doh! *

    Unfortuantely this sort of thing can be taken care of when you buy the first house, but it's almost impossible to fix after you've paid cash for a property.

    You could sell your existing house to a hybrid trust, then use the cash to buy the new house. There would be significant costs in doing this, but it would likely be worth it in the long run.

    You also really need to make sure your accountant is comfortable with this strategy. I've been vauge about the implementation of this idea deliberately because it would be best that your accountant explain how it applies to your circumstances.

    It would also be a good idea to have a discussion with an accountant and a good broker about your future plans before purchasing the next property. You don't want to be in the same situation again in a few years if you upgrade in the future.
     
  8. alexlee

    alexlee Member

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    There's nothing inherently wrong with buying a 'bigger, flashier' house.

    If you can afford it, go for it.

    The tax situation is unfortunate, however.
     
  9. Rolf Latham

    Rolf Latham Member

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    Hiya

    A spousal sale may work for you, since I believe in Vic there is no stamp duty payable.

    A 105 % of value of property to a unit trust may also be worthwhile, BUT there is no easy or cheap fix.

    The spousal sale option may work well for you

    Any good broker can run through that option with

    For future reference, many migrants can get funding if they have work, even without a full perm residence visa dependant on LVR and circumstances

    DONT take tax advice from a broker............ many of us know alot BUT we arent licensed to provide that advice :)


    ta

    rolf
     
  10. Aaron_C

    Aaron_C Finance Broker

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    I do suggest you speak with someone about a financing plan going forward to unravel the current situation. People will say it's a good problem to have though!
     
  11. Terry_w

    Terry_w Member

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    Wow, a costly mistake.

    Spousal sale may work, but if you both own the current property then only will be 50% effective.
     
  12. kum yin lau

    kum yin lau Member

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    Hi, the point is, why such a convoluted plan to get to point B from A?

    If the end result is to live in a bigger PPOR, then park all existing equity in the new house aka sell current PPOR, realise about 300K after costs then buy 550K house with 250K borrowings.

    If necessary to have offset acct, then increase loan amount to 400K

    The one thing that you can't have is tax deductibility - that comes only when you borrow to buy an investment.

    KY
     
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  13. Elstupido

    Elstupido Member

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    Unfortunately, lots of people have done this mistake
     
  14. kum yin lau

    kum yin lau Member

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    Hi, it's not a mistake to pay cash for PPOR. I did that too, before I bought other properties.
    A paid off PPOR is a great base for investing.
    I used it to borrow for 3 PIs and 2 small commercial properties, all inside 4 years.

    The mistake here is to extend the borrowings for PPOR hence not achieving any financial advantages via -ve gearing.

    KY
     
  15. Rolf Latham

    Rolf Latham Member

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    Sure, in some managed circumstances

    until you want to convert the PPOR to another IP, and move to a new PPOR and need to borrow.........as per the OPs point

    Never pay cash for something unless you need to..........not an absolute statement but not far off

    Aside from convenience and emotional fluff ( which can sometimes be valid) a paid off PPOR for a future investor makes little sense in most ( but not all) scenarios.

    Some things to consider that may not be relevant to all, but will be relevant to some

    1. Borrow money when you dont need it.......personal circumstances, market considerations, and money market liquidity may rapidly change ( overnight). Instead of having 400 k sitting in an offset account to use for challenge or opportunity one has a title deed in the safe.

    2. Cash out. Increasingly, lenders are loathe to lend cash for "unspecified" purposes and are asking for various levels of proof and control of funds. Yes, not insurmountable,and most lenders we can get around this at or below 80 % lvr......but it is a consideration especially for those who are self employed, or have a commercial property investment portfolio.

    3. Asset protection. A decent mortgage on a PPOR can be a strong antidote for someone looking to chase you( unless its the mortgagee :) )

    4. Taxation considerations exactly like the one the original poster has now found themselves in. The worst case scenario is SELL. Replacement cost to replace the growth asset with a like growth asset varies obviously, but 8 to 10 % would not be unreasonable,a hefty post tax cost.

    5. Mortgage fraud, only a weeny thing, and in some states this is finally less of an issue.

    6. Existing credit file and good repayment history. Again only a small one, but you will end up with abetter credit score if you have an existing loan, and especially so if the next application is with the same lender.

    I am sure we can find others.


    Folks always say, it wont happen to me.........which I find silly, since almost all of us NEVER intend to crash our car, yet we carry car insurance .........so why not carry appropriate "lending and structure insurance" and have the right structure to start with.

    Might never ever need it, but for the piddly cost of a loan application, some mortgage rego fees and other minor inconveniences.......

    Finally, of course, what else would you expect someone that sells debt to say, so have a think about personal circumstances as to what benefit a cash paid PPOR is to all of you and report back.

    As I said at the start, the theory doesnt apply to all, so lets open the floor folks !


    ta
    rolf
     
  16. pully

    pully Member

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    congratulations in having a home of your own and paid for. debt free is not a bad position to be in.

    it gives you breathing space and you can now seek advice about how to move forward to achieve your goals.

    yes expert advice will be required to explore all your options and formulate a plan to get what you want.

    borrowing to invest will require information on a variety of issues as others have mentioned. a lot may also depend on your time frame, income etc.

    not everyone is comfortable with having a high level of debt. find out what is best for you. there are many ways to get what is important to you.

    good luck it is a good time to buy and money is cheap. just get the structure and plan set up correctly and the rest will follow.
    all the best.
     
  17. Mick C

    Mick C Mortgage Broker

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    Not much you can do now if you paid cash for an IP...you really need to either sell it back to a trust ( not a perfect solution) however the interest can not be claimed from your own personal income, unless you do hybrid which is a pain in the ***...another possible way is to just sell and buy a new property and start from scratch...yep both method arn't perfect.


    Regards

    Michael
     
  18. Terry_w

    Terry_w Member

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    I must disagree with you here. It is not really a mistake, it is just that things could have been structured so as to offer a variety of other benefits such as Rolf mentioned - mainly tax savings (considerable too) and asset protection.
     
  19. DaveM

    DaveM KFC Buyers Agent

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    You are disagreeing with yourself on a public forum? Too much red wine on a fri night? :)
     
  20. Terry_w

    Terry_w Member

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    Yes, well I was wrong so had to criticism myself.
     
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