What would you do? Take a profit?

W

wannaretire!

Hi everyone, I hope you don't mind me posting on here for some opinions/thoughts on my situation.

My husband and I have been investing in Melbourne property since 1997 and we are now both 40 years old. We have just paid off our own home and would really like to upgrade to our "dream home", which would cost around $850,000 including stamp duty.

We are therefore thinking of selling our current PPOR for around $700,000. Reasons for selling are:
  • There would be no CGT payable as it is our PPOR
  • It is an old house and we can foresee having to spend a lot on it for maintenance in upcoming years
  • There is a large block of land at the back and we are worried that the block will be sold and overdeveloped, thus decreasing the value of our property
  • The loan is quite high ($550,000) and if we rent it out and interest rates continue to go up it will cost us a fair bit, even after negative gearing

Perhaps more contentiously, we are also thinking of selling the first IP that we bought in 1997. It is a 2 bedroom unit valued at around $500,000. We have equity in it of $375,000 and it will be around 1/3 CGT free as we lived in it for a while in our early years. Reasons for selling this unit are:

  • We think it prudent to take such a good profit. It would really help to set us up in the future and make life far more comfortable. The fact it is party CGT free is also tempting
  • We are also uneasy about Melbourne property prices as it seems astounding that a 2 bedroom unit is worth this amount (the valuation is pretty spot on as it is a neat unit in a very exclusive/sought after suburb where units are scarce)

I know selling the unit this goes against the theory of buy and hold, but isn't there also some merit in taking an actual profit rather than just having profit on paper?

We are also thinking of also selling shares that we own worth $125,000. We have made a loss of $55,000 on them :( that we can offset against the capital gain on the unit, so now might be a good time to sell them as I'm not expecting great things from the share market in the foreseeable future.

If we do sell the unit, house and shares, we plan to buy a new PPOR (probably with a different lender, to keep the PPOR separate from the IPs) then look to invest in other properties, using the equity in our remaining IPs. We may also invest in some shares again.

So what would you do in our situation? Sell the PPOR and/or unit and/or shares? If we sell all of them we can buy our dream home, have some money left over to invest and still have 3 investment properties with equity of around $600,000.

If you have read this far, thanks and I look forward to hearing your thoughts! :)

Ivy
Long time lurker, first time poster!
 
What companies are the shares in?

I'm assuming that if you sell the PPOR, unit and shares you won't need to borrow for your dream PPOR.

What is the rent on the investment property? How much rent do you think you could get on the PPOR?

If any of those 2 properties offer good rental yields, I would consider keeping them as when you retire, you should be aiming to live off the income, not the capital.
 
The Y-man said:
There seems to be a contradiction - I'm confused... :confused:

The Y-man
Click to expand...

yes I saw this too. not sure what OP meant here.

The answer to your question depends where you want to be and when.

Sounds like you are keen on the dream PPOR, so go for it. I agree with pickle-pickle, that unless you are planning to LOE, focussing on yielding assets should be considered.

Do your shares yield well?
How about your IPs?
You mentioned you have a lot of equity, how would you use this to reinvest?
 
Hi Pickle - the shares are mainly in blue chip shares, predominantly banks. Yes if we sell our current PPOR (net proceeds around $700k as no CGT will be payable) and the shares (value $125,000) then we probably wouldn't need to borrow much or anything for the dream home. The proceeds from the unit would just be extra money taken for the good profit that we have made so far and would probably be used to reinvest in shares and/or property (and maybe buying some new furniture!)

The rent on the unit is around $300 per week and the unit is valued at around $500k. The rent we could get on our current PPOR is around $500 a week and the loan on it is $553k.

Hi Y-man - we have paid off our current PPOR in that the loan is $553,000 and we have $553,000 sitting in an offset account. We could if we wanted to take the money out of the offset and use it towards the new dream home. The PPOR is valued at around $700,000 so if we sold it we would have access to the entire $700,000 and not just the $553,000.
 
Assuming the contradiction mentioned above is a typo, I reckon you have it all together and don't need "conformation" from people you don't know.

It all sounds great and congratulations. Do we know each other? LOL
 
I would keep the shares. Capital losses aren't that useful as the losses apply before discount. The share market will pick up and it's good to have a diverse amount of shares.

The yield on the unit seems weak to me, so I would say sell the unit and PPOR, however keep the shares.
 
The contradictions I see is between the name 'wannaretire', 'dream home' and 'time'.

Compromise is possible on one, but at the expense of the others.

Eg to retire sooner you're better off with a more modest home and more non-home investments for income.

Conversely getting the dream home may mean putting off retirement.

Leaving aside the super-rich, Australia's class structure is pretty much as follows:

Poor people have almost nothing and are very likely renters.

Rich people own assets (real estate, shares, businesses) of which their own home is only a small proportion. Unlike one's own home these assets can provide income and hence financial independence. This obviously beats being poor!

Most middle-class people have their own home, a bit of super and maybe some other investments. But mostly it's their own home and their spending is a bit too high. It's this lopsided asset allocation that prevents financial independence - ie too much tied up in their own home and too little in the non-PPOR assets that will provide their only source of future income (ie IPs, shares, businesses etc).

Hence there is a risk that buying a better home (if that's all one does) moves one's financial profile away from the rich towards that of the middle class. Which may not be conducive to financial independence long term.

Now it might be possible to come up with an arrangement that allows the trifecta - dream home, early retirement and achieving this soon.

But then there's a 'risk' factor to worry about to get the higher returns needed to achieve all three.
 
Spiderman, that is very well written. Just wanted to thank you for putting that down on the forum here. It sure helps me realise that what we're trying to do is the right thing and although the dream ppor looks attractive it's not always in our best interests.

Gools
 
Share loss

Hi There,

Just check with you accountant re the loss in your share's as I understand that you can only claim the loss in any shares against any profit in shares sold. You can't claim the loss in shares against any profit in property. That was our experience a few years ago, rules may have changed so worthwhile asking.

Regards

Bullfrog
 
Bullfrog said:
Hi There,

Just check with you accountant re the loss in your share's as I understand that you can only claim the loss in any shares against any profit in shares sold. You can't claim the loss in shares against any profit in property. That was our experience a few years ago, rules may have changed so worthwhile asking.

Regards

Bullfrog
Click to expand...

Doubt that's right. :)
 
capital gains are only offset by capital losses (regardless of source).

Income losses (negative gearing) only can be claimed against other income (not capital gains), regardless of source.

In other words, gains/losses can only be offset against losses/gains of similar nature (capital/income), and are not matched to the source of the income (job, rent, dividends).
 
Good post Spiderman. If all they are trying to achieve is a dream home with no debt, it is easy.

Perhaps they should consider renting out the current PPOR then renting a dream house for a couple of years. Invest the $500k(currently in the offset account) to provide some passive income. They can have their cake & eat it without having to sell anything!
 
If I was in that position I'd liquidate enough assets so I had enough cash to buy the dream home debt free. I agree with that philisophy. Life's to be enjoyed - it's not all about accumulating as much assets as you can before you die - so the idea of having a dream home that doesn't produce income is a lifestlye investment

To do that I'd need to look at what assets I'd need to sell in order to achieve that bearing in mind future investment strategy and current income tax position.

First - the current PPOR would go - Pay out the $553k loan from the offset funds , sell it for $700k which would leave you around $650k after selling costs. Then you need to find another $200k. In this climate I'd be keeping the shares to try and recover some of the $55k loss bearing in mind that shares have made some improvement since GFC and continue to improve. If you do decide the sell the shares though, the fact you have no capital gains which to offset the capital loss against is not fatal as you can carry forward capital losses indefinitely until such time as a capital gain arises.

If the unit is in joint names then sell your half to your spouse for $250k (or vice versa depending on who is on the highest marginal tax rate). He borrows the full $250k and you use $200k of the $250k proceeds to add to the $650k so you have enough to buy the dream PPOR. Yes your spouse will be up for stamp duty of around $10k on the part sale (based on NSW rates not sure about VIC) but there'd be stamp duty in any event if you were to sell outright. There'd also be some CGT applicable. However you could sell enough shares to offset this loss in part or whole.

So after that you're left with

- A PPOR worth $850k that is debt free
- Shares worth $125k and rising.
- A unit worth $500k with borrowings of $375k (up from $125k) with interest that is fully deductible and retaining rental income
- $50k of cash to either put towards another PPOR or have a holiday

I wouldn't worry about interest rates rising nor would the perceived high unit value be a concern. I'll give you $300k for it if you think $500k is too much !

What are these other 3 IP's you talk about with $600k equity? Do they come into the equation at all?

Like a lot here I guess, I personally wish I had your problem.
 
Thanks very much everyone for your great replies!

To answer a few queries/clarify a few points:

Pickle - I gave you the wrong yield figures for the unit and PPOR, I can only blame it being late at night when I replied and my pregnancy brain! We bought the unit for $125,000 and the loan is now $175,000 (I sold my share to my husband some years ago now). So with rent being $300 a week the yield is nearly 9% (I'm not sure if I'm working that out right, I guess I base it on the amount owing?) The loan on the PPOR is $553,000 (we bought it for $521,000 and costs were added to the loan) and with rent of $500 a week, the yield is 4.7%.

Ski bum - what is LOE - live off equity? If we sold the unit, we would use some (most?) of the profits to invest in maybe new shares, or new property, or another option would be to pay it into an offset account on one of our other properties so we in effect own it. We should have enough existing equity to continue purchasing other properties without having to use our own cash. It's bad isn't it that I don't really know what our shares yield - shares don't really interest me and to be honest I think they're a pain in the backside at the moment! We certainly bought them when they were more expensive than what they are now.

Sunfish - thanks! We are really in a quandry though and feel as though we are at the crossroads at the moment and really appreciate all the informative opinions on this site! Especially as none of our real life friends are into property investing so we don't have anyone to really bounce ideas off.

Spiderman - thanks for your great post, you make some great logical points. I believe even Warren Buffet lives in the same little house that he's had for years! From our point of veiw though, it's hard to come home to a house that we don't really love.

WillG - that is a great suggestion re the renting. I have never rented before though and don't know if it's in my nature - I've always felt really bad when we have ended tenants' leases for various reasons and don't really want to be in that position myself, especially with a young family. It is a great idea though and we will consider it. I might even go and have a look at some rents now! What do you mean by passive income - a term deposit or something that will give us income that would help offset the rent we would have to pay?

Ozmale42 - Your analysis of our situation is spot on. Your suggestion for one of us to sell the unit to the other is great, but we did that a few years ago and I'm not sure how the ATO would respond if we did it again! Thanks for the offer of $300k but I think we'll keep the unit :) The other 3 IPs are a house in a regional area that we bought earlier this year and have no equity in, a flat in a good area (but the building itself is pretty old) that is worth $330k to $360k and we owe $250k (so it's not really worth selling after paying CGT and selling costs, plus we have just got new tenants in it), and a house that is worth around $850k that we owe $343k on. If we sold that house we would have only 1/2 of the profit assessed for CGT as it was our PPOR for 1/2 the time we have owned it, but we think it will probably increase still further in value and we have just got new tenants in it. They are paying $470 a week rent so the yield is I guess around 7%.


Whew! Thanks again everyone, it has been really therapeutic to put all of this out on the page! I'd really welcome any more comments, especially in light of the new info I've provided above. Everything that has been said so far has been great and has given us a lot of food for thought.
 
Last edited:
ozmale42 said:
.......as you can carry forward capital losses indefinitely until such time as a capital gain arises.
Click to expand...

I do not think that is correct. I thought you had up to five years from the time you incurred a capital loss until you offset it with a capital gain. After that, it's tough titties.

If I'm wrong...and I hope I am, then great.

Can someone clarify.
 
wannaretire! said:
and a house that is worth around $850k that we owe $343k on. If we sold that house we would have only 1/2 of the profit assessed for CGT as it was our PPOR for 1/2 the time we have owned it, but we think it will probably increase still further in value and we have just got new tenants in it. They are paying $470 a week rent so the yield is I guess around 7%.
Click to expand...

WR, your posts are a little hard to follow. Maybe you could use dot points or more paragraphs to break up your different IPs, options etc.

Is that for real that you are only getting $470/week for an IP valued at $850k?
If that's what rents are like in your area then I would certainly be renting your dream home rather than purchasing it. Better off using your money else where.

It's great you have plenty of options though as you have some good equity around the place.

Keep up the good work and keep looking long term rather than short term if you can.

Gools
 
wannaretire! said:
We are also thinking of also selling shares that we own worth $125,000. We have made a loss of $55,000 on them :( that we can offset against the capital gain on the unit, so now might be a good time to sell them as I'm not expecting great things from the share market in the foreseeable future.

Long time lurker, first time poster![/I]
Click to expand...

so sell the shares to 'capture' the loss and then buy them back several weeks later (dont sell and buy back on the same day, the ATO might not recognise it).

You get the shares back and you get the capital loss offset (the consequence of this is that when you re-sell those shares in the future it will be from a lower cost base)
 
wannaretire! said:
Hi everyone, I hope you don't mind me posting on here for some opinions/thoughts on my situation.

My husband and I have been investing in Melbourne property since 1997 and we are now both 40 years old. We have just paid off our own home and would really like to upgrade to our "dream home", which would cost around $850,000 including stamp duty.

We are therefore thinking of selling our current PPOR for around $700,000. Reasons for selling are:
  • There would be no CGT payable as it is our PPOR
  • It is an old house and we can foresee having to spend a lot on it for maintenance in upcoming years
  • There is a large block of land at the back and we are worried that the block will be sold and overdeveloped, thus decreasing the value of our property
  • The loan is quite high ($550,000) and if we rent it out and interest rates continue to go up it will cost us a fair bit, even after negative gearing

Perhaps more contentiously, we are also thinking of selling the first IP that we bought in 1997. It is a 2 bedroom unit valued at around $500,000. We have equity in it of $375,000 and it will be around 1/3 CGT free as we lived in it for a while in our early years. Reasons for selling this unit are:

  • We think it prudent to take such a good profit. It would really help to set us up in the future and make life far more comfortable. The fact it is party CGT free is also tempting
  • We are also uneasy about Melbourne property prices as it seems astounding that a 2 bedroom unit is worth this amount (the valuation is pretty spot on as it is a neat unit in a very exclusive/sought after suburb where units are scarce)

I know selling the unit this goes against the theory of buy and hold, but isn't there also some merit in taking an actual profit rather than just having profit on paper?

We are also thinking of also selling shares that we own worth $125,000. We have made a loss of $55,000 on them :( that we can offset against the capital gain on the unit, so now might be a good time to sell them as I'm not expecting great things from the share market in the foreseeable future.

If we do sell the unit, house and shares, we plan to buy a new PPOR (probably with a different lender, to keep the PPOR separate from the IPs) then look to invest in other properties, using the equity in our remaining IPs. We may also invest in some shares again.

So what would you do in our situation? Sell the PPOR and/or unit and/or shares? If we sell all of them we can buy our dream home, have some money left over to invest and still have 3 investment properties with equity of around $600,000.

If you have read this far, thanks and I look forward to hearing your thoughts! :)

Ivy
Long time lurker, first time poster!
Click to expand...

I'm in the camp of never sell, so I struggle with these decisions too.

My opinion is this; you are now 40 years old, and have paid off your own home, AND still have an IP worth a good deal of money, which provides a good return to you in terms of cashflow, and other deductions.

You have done very well!

I think you should keep the IP, as it has a good deal of equity which can be used for further investing. To sell it would trigger cap gains tax. Nothing wrong with this to some people, but I hate the idea of seeing part of my wealth being given to those b*stards in Canberra for nothing.

Selling the shares which have made a loss maybe the best solution to minimise your extra non-deductible borrowings to build/buy the new PPoR.

Most people hate to sell for a loss; they prefer to sell the winners and ride the losers...I don't get that one. If you sell the shares, you will have no cap gains tax to pay.

If you had to sell the current PPoR, and have to borrow a little bit to get 'er done, then I reckon go for it. Time to enjoy a bit.

Yes, it's non-deductible debt, but it's not much (maybe $100k?) and by the sounds of your pattern; you manage money well and could get the debt down quickly.

Then, you have a lot of equity in both your PPoR and your IP to use for more investing to further increase the wealth base and hopefully more income.
 
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