Join Australia's most dynamic and respected property investment community

Clean slate - what would your optimal strategy(s) be?

Discussion in 'Accounting & Tax' started by PerthPadawan, 14th May, 2016.

  1. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    My wife and I have recently emigrated back to Australia, and are new to the Australian property market, and crucially, accounting and tax rules. Just by being on this forum and going through some of the incredibly helpful posts I have been blown away by the expertise on show here. I would be grateful for your thoughts on an optimal strategy given we are starting with a clean slate.

    Think what you would do if you were a young greenhorn Terry with all the knowledge you have now!

    Scenario:
    Wife: Australian - no/low income
    Myself: Foreign - med-high income
    $600k cash available
    First Home buyers (Perth is under $430k no SD, under $530k reduced SD)
    Goal: Maximise investment/tax benefit, retain flexibility to move house once kids are factors

    Strategies currently thinking about (please criticize thoroughly)
    1. Buy 600k PPoR1 cash, house in both names (needed for FIRB). Live x years. After x years buy IP1, mortgage on PPoR1 (tax deductible interest I understand). If desired, move into IP1 to live, but keep PPoR1 as PPoR. Follow Terry tips to avoid tainting deductible mortgage interest.

    2. Buy 430k PPoR1 cash. Save on Stamp Duty $$$. Live 1 year. After 1 year buy IP1, mortgage on PPoR1. Move into IP1, but keep PPoR1 as PPoR.

    Are there better strategies you would follow? Does option 1 work or should I not buy PPoR in cash but mortgage (and why?) Does option 2 save me Stamp Duty that I would otherwise have to pay for an equivalent $430k IP? Am I losing out on full benefit of tax deductible mortgage interest?

    Thanks guys.
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    If you're looking to move from the first property, I would not pay cash. It's harder to mortgage the full value of an unencumbered property than it is for a purchase, and if you mortgage the first house and use the funds for a new PPOR, the interest isn't deductible.

    You'd be better off paying the deposit on cash (20% for eg to avoid LMI) and having a loan for the other 80%. Put the rest of the cash in offset so no interest payable.

    Then when the time comes for number 2, you can either use equity in P1, or a repeat what you did with P1 and use a cash deposit with the balance made up with a loan. Have any cash offsetting the loan of which ever house you're living in.

    Also, the CGT PPOR 6 year rule thing is different and not applicable in regard claiming interest - I think you're getting them confused. If P1 (which you've bought with cash) is earning rental income, but its debt relates to the purchase of P2 which you're living in, the interest on the loan will not be deductible b/c you are living in P2. This is regardless of whether you're claiming the PPOR 6 yr thing on P1 or not.
     
    Last edited: 14th May, 2016
    Azazel and PerthPadawan like this.
  3. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    Hi Jess,

    Would the associated fees with taking out a mortgage (real upfront and ongoing costs) not be detrimental, regardless of not paying interest with offset account? These can seriously add up.

    If I mortgaged my PPoR1 to buy an IP it would be deductible though correct? When does it stop becoming deductible later on?

    Thanks, PP
     
  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    Many lenders are waiving application fees at the moment, so the real cost of set up can be quite small - around $500 or so for legal and government costs. Also the stamp duty and buying costs, which you'll be paying regardless.

    Ongoing fees can be up to $395/yr but there are some lenders that have no ongoing fees so it's just a matter of choosing the lender that fits.
    Yes it would be deductible if you bought an IP. It stops being deductible when you move in and it's no longer earning income.
     
    PerthPadawan likes this.
  5. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    So if you own your PPoR outright, wanted to move but keep the current house as an IP, you cannot have a deductible mortgage unless you have an outstanding debt on it?

    Vs someone in the same scenario but staying in their PPoR instead of moving into their IP, that means they can have a deductible mortgage?

    If that ATO's intention, it seem like you push people to take out debt, or stay where they are...I'm missing something surely.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    That's right. That's why a flexible loan structure is so important, people move all the time so having things set up correctly can save you thousands of dollars over the long term.
    Yes. It's the purpose the funds are used for, not the security of the loan that determines deductibility.

    It's not an issue as long as you do a bit of forward planning and get decent advice before jumping in.
     
    PerthPadawan likes this.
  7. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    Thanks Jess. Good to know these quirks of the system.

    Taking the conversation a step further, to take advantage of the FHB Stamp Duty exemption I believe it would be prudent to buy a property up to $530k first. If this is not the house we want to live in the medium term, the optimal choice would be not to buy it in cash but IO mortgage with offset account, and borrow the maximum?
     
  8. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    2,959
    Location:
    Perth
    yes this is correct. The stamp duty savings fall off quite rapidly.
    You may also want to look at building as the grant for that is more than established.
     
    PerthPadawan and Jess Peletier like this.
  9. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    2,959
    Location:
    Perth
    If I had $600k cash and medium to high income you have sooo many options.

    1. rent and buy 3 x $500k IPs with $100k in each offset ($100k deposit on each)
    2. buy $500k PPOR with $100k deposit (with FHOG blah blah) and 2 x $500k IPs with $100k deposit each) and leave remaining $300k in offset on PPOR
     
    PerthPadawan likes this.
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    That's right. As Westminster said, building will get you a $10k grant in addition to the duty exemption, plus you only pay stamps on the land value rather than the full property value once established.

    Another benefit of building is that when you do move out you've got a near new house to depreciate.
     
    PerthPadawan and Westminster like this.
  11. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    Hi Westminster, I think that's the issue I'm facing, trying to assess the optimal one.

    I should probably have stated I have a bearish view on the Perth property market for next few years so would only look to buy one property at the moment. Buying multiple IPs now means I would leverage myself to oblivion (if my assumption is correct that is).

    Regarding the building option by Jess/Westminster - Thinking aloud I would not be saving on rent in the meantime before the build. Plus building somewhere would possibly limit you to outer suburbs for $500k only (lifestyle choice there). Plus building in the current Perth market may not be the wisest considering the risks for just $10k grant. Or am I overthinking?

    Considering my bearish 12-18 month view on Perth (but still wanting to buy to save rent), would your strategies change?

    Thanks very much.
     
  12. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    2,959
    Location:
    Perth
    Being a bear is fine :)

    For a PPOR what would your prime area be? Keeping in mind that you may change it to an IP in a short amount of time. If you are from the UK you could join the rest of the expats in the Northern Beaches suburbs - Mindarie is super popular.

    Building at the moment is pretty good - there are some hungry builders throwing in all sorts of things from doubling the FHO Grant, a pool, a overseas holiday etc etc.
     
    PerthPadawan likes this.
  13. Azazel

    Azazel Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    8,113
    Location:
    Brisbane
    Nothing wrong with educating yourself on where other locations are in the property cycle.
     
    PerthPadawan and York like this.
  14. York

    York Finance Broker Business Member

    Joined:
    24th Jun, 2015
    Posts:
    1,623
    Location:
    Sydney
    If you are bearish on Perth, why not consider other markets? As @Westminster said, rent a property and make your money work for you in growing markets. With that much cash and high income, you could get some decent exposure.
     
    PerthPadawan likes this.
  15. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    Westminster - We are not British but the beaches are stunning here. My Australian wife has her eye on the Western Subs, and I the beach/train. So the WS part of the coast seems a good fit. How much (town)house you get for $430-530k or even $600k is debatable, but then again its not the house we want to live in medium term.

    Re: building its something I've not considered seriously before, but will look into it thanks.

    Azazel/York - thanks for your thoughts, I am short-term bear on Perth, but as I am (i) new to Oz (ii) new to IP and (3) not confident to have long-distance IPs at this stage, I will restrict myself to Perth property or just invest in other assets I think. The wife (no/low income) would also be able to manage/do up IPs if they are in the vicinity.

    Thanks for the thoughts though, if the market turns (or I am plain wrong about the market) I may need to reconsider.

    PP
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    9,033
    Location:
    Sydney
    Who owns the cash?

    If you, great. You could

    1. Buy in wife’s name. You lend her 100% of the purchase price

    2. Cheaper property means lower use of resources and save stamp duty

    3. She gets a LOC set up

    4. You may have to go on the LOC loan to make it service

    Once you get residency and can buy on your own you could buy on your own borrowing the deposit from the LOC.

    Park any excess cash in offset account on this property.

    Wife could also possibly buy an IP on her own by using LOC funds. It would be more tax advantageous to park the cash in her offset – after considering the tax and legal implications.


    Later perhaps you may want to move out of the main residence. The wife could refinance the loan she has to you with a lender such as a bank. Since the original purpose was to buy the property the interest on the full loan should be deductible if done right.


    -

    If you both own that cash then you cannot lend to each other.

    But you could still

    1. Buy in wife’s name

    2. For cash perhaps

    3. Then get a LOC in both names

    4. Invest using the LOC as deposits

    5. Some in your name and some in her name


    For any property you buy you could live in it for a few months and establish it as the main residence and then later decide whether to claim the main residence exemption on that property if suitable.


    -

    Other options

    Gift $600,000 to a discretionary trust and borrow it back. Get good legal advice before doing this.

    Buy for cash in one name

    Let trust take a mortgage or

    Take a LOC out with a lender and let them take a first mortgage with the trustee taking a second mortgage for the money it is owed

    Good asset protection, land tax exemptions, and CGT exemptions available.
     
    Westminster and PerthPadawan like this.
  17. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    Wow I'm going to read and comprehend first but before that thanks!
     
  18. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    Yes, 95% mine. However as we are married a certain % (only a %) of the monies are commingled does this present an issue?

    So a PPoR.
    Is the benefit here to reduce future CGT/taxable rental income as they would come under her name only on a lower tax rate? Because we could always buy as joint tenants.
    Or the main benefit is that the money is a loan and therefore can be future deductible when refinanced correctly?
    How would such a loan work in practice, is it simply documented between us?
    Would it be unsecured, or secured on the property?

    You mean in regards to the first property bought, yes I understand.

    Would she be able to set up a LoC if I have loaned her 100% of the purchase price under point 1? Or would the bank consider the property bought with cash as we are married/my loan is unsecured?

    Will I be able to go on a LoC backed by a property when I am not on the title?

    So I buy the IP? (as my wife will have bought in point1)
    What would be the benefit of buying on my own, if I am the main income earner? Would I not wear full CGT if we decided to sell it in future?
    I understand excess cash in the offset account here would lower my deductible interest payments. Do I not want to keep interest payments high to reduce taxable income?

    So my wife has a deductible loan against her property (previous PPoR). The cash goes back to me to pay my loan back. I use the cash to buy the new PPoR. If this is what you mean, it's genius.
     
  19. Yann

    Yann Active Member

    Joined:
    10th Jul, 2015
    Posts:
    41
    Location:
    Brisbane
    Hi Padawan

    Couple of main things to think about:
    - do not mix owning a PPOR and investing in property, it is mostly different. A PPOR is a lifestyle choice, not always the best use of money when you start off, and you will usually want something nicer than an IP so it would likely not become the best IP later on.

    - think of renting first instead. So you can move if/when you want it, and I at the moment it is cheaper to rent than own in most capital cities in Australia.

    - do not focus too much on FHB grant and other savings. There are just a drop in the glass and might make you take the wrong steps first and make you loose a lot more on the longer term. There are options to buy IPs and still use the grant later on (ex buy in DT).

    - thinks about objective rather than strategy and plan first. Until you answer what you want to achieve in 10 years, hard to draft a plan. And don't kid yourself, becoming rich is not an objective. You need to write (write is crutial) with your wife on what personal, professional and financial objective you both have and discuss. Then put precise numbers for the financial part, like how much equity at what date, how much income etc... Then work out how much property/shares/loan gives you this at that stage and work backwards to see what you need to do each year to get there, if obviously not realistic, then start again.

    - get your ownership structure and loan pre-approval even before you start looking at properties.

    Yann
     
    Terry_w and PerthPadawan like this.
  20. PerthPadawan

    PerthPadawan Member

    Joined:
    14th May, 2016
    Posts:
    14
    Location:
    Perth
    Hi Yann,

    Appreciate your thoughts thanks. I think your advice is great, but we have already thought through most points. Hence why I am on this property forum. We are not new to living together etc, and we are not new financially but having significant investments which we have/can liquidate. We are however new to Australian property.

    - We have the cash to buy a PPoR/IP now and can save significantly if we set it up right. We also are not adverse to living in it for a period for full benefit as Terry advised, we know our priorities there.

    - We have cash to put to work and saving rent is a low-risk strategy we want to do (apart from lifestyle benefits)

    - I'm not focused on the grants, in fact Perth does not have any for established homes and am not prepared to build solely to get it (see earlier post). However stamp duty savings are significant.

    - in our mind it's not about rich/not rich. In many ways we are "rich" now, no kids yet and can buy a house outright if desired, have steady income. Our questions here relate to optimal property strategies - not that we will follow them like gospel, but to see what is available if done right.

    - good point on getting house in order before buying, hence why I am here to draw on people's expertise like yours. But my advice is always keep looking at properties, if only to know the market you are in.

    PP