Optimising cash purchase holiday home

Hi

New to the forums. Finding a lot of help so far.

I'm looking to buy a holiday home - understand this is challenging as "investment".

Own PPOR outright. Planning to spend $650-700k cash. Married couple, both top marginal tax rate.

Willing to rent out a bit.

Rather than "pure" "best" investment, I am looking to optimise tax outcome. Where do I start? I understand this isn't necessarily the best return for my money, but would like to work out how to optimise given I know what I want to do.

In particular, would like to get across positive/negative gearing choice.

We don't need the cash to hand - but could it be better to borrow part of purchase price anyway?

Thank you very much.

 

Deductions are based on the usage - If you use weeks of peak demand seasons, your deductions are hammered. Likewise the property must be available for holidays ie actively marketed (whether this is a local agent, websites, Airbnb etc) - your accountant should be able to advise before you enter into a contract to buy.

 

Where is the cash coming from?

Although interest won't be deductible while using the place if there was interest incurred it would be added to the cost base to reduce CGT when it is eventually sold.

So one strategy may be to use the cash to invest in a tax effective investment elsewhere and borrow to buy this one. You might be able to claim some interest while it is genuinely available for rent and the other interest not claimed could be used to reduce CGT when sold.

later on you could potentially move in and wipe out any CGT it is pregnant with too if it was the main residence of the owner at death.

 

Blending private use and investment is fraught with peril. You really cant do both and will have a compromised position which generally is self-focussed. The ATO will be far more diligent in such cases to attack the % deducted. One recent one told me at the time of the audit commencing that it was only used a few weekends and was adamant this was not more than four in the year. The agent disclosed to the ATO that their records indicated it was used 13 weekends incl a block of three weeks at Christmas. That didnt work out well. Lied to me and the ATO. The taxpayer was lucky that they only disallowed 50% as they could well have applied penalties and even disallowed all deductions beyond the income reported. The ATO basis for 50% was based on a arguable position that more rent would have been earned at Xmas and long weekends which the agent confirmed.

 

I wouldn't be surprised if the best investment and tax outcome would be to donate to charity each year, and just rent a holiday house as required. Invest any leftover in anything else you want.

Personally I find trying to combine personal and investment goals into the one asset just ends up with subpar results for both.

 

Thank you. This is very helpful. I don't have any particular investment goals here, rather would not like to look back and think I'd made truly terrible decisions/that there was an obvious saving that "everyone" would have implemented and that I was unaware of.This makes me feel more confident in simply planning to enjoy the home. Thank you.

 

Pay cash for the property. You can still borrow against it for a tax deductable loan. It is the purpose of the loan that makes it tax deductable not the use of the security. If you qualify for a loan you could perhaps borrow 60%, 400k. invest else where , in 1 or 2 properties and still get tax deductions, in property, shares, a buisiness, gold ETF or managed fund. You can have your cake and eat it too. It doesnt have to be one or the other, your holiday home could be the best investment any-one could make, perhaps get CG while paying for it self and earning you income. If you have no goals or interest in managing money, just put loan funds in a high performing managed fund.