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Our situation please help?

Discussion in 'General Property Chat' started by Good Vibes, 11th Jan, 2017.

  1. Good Vibes

    Good Vibes Member

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    For years we diligently paid off our mortgage on our home using it as our main asset. Two years after paying our mortgage off our circumstances have changed and we had to relocate two hours north. We have now been in a rental for 5 months and our mortgage free home is on the market. We have been unable to sell our home regardless of a significantly lower price point than what we purchased the house for 8 years ago. The WA housing market is widely said to be the worst it has been for 7-8 years so we are facing a rather large loss to sell the house. We are now facing the scenario where we may have to rent the house out which is not something we wanted to do. I wanted to sell so I could move forward and get our equity out of the house. I can not buy another home unless I sell our home.


    I do not know much about investment properties and I thought if I could somehow get another mortgage on the house and turn it into our investment property it would make a good investment. My husband however says that we can’t do this because our house is mortgage free.


    I don’t know why this is the case and I am quite confused. If we rent the house out as it is we have all our equity tied up and will have to pay tax on the rent we receive and we won’t be able to buy another house as all our equity is in the house. As I understand it now even if we managed to buy another house with a very large mortgage we could not claim any tax offsets because it would be our primary residence rather than a investment property so we would be stuck with an extremely large mortgage and rental income we still have to pay tax on for our first home.


    This all seems confusing and unfair and I am not sure who to talk to or what to do. We approached a property manager and it looks like after all the costs i.e. fees and insurance we will receive less in the hand than we currently pay in rent. Then we will still need to pay tax on the rental income we get. I feel a bit stuck and would appreciate advise or ideas on what we can do. I don’t really know where to start. Do you know of an honest and knowledgable finical adviser in Perth or even some legitimate articles I can read to start understanding investment law?


    I hope my husband is wrong and somehow we can strip the equity out of the house by getting a mortgage on it and turning it into our investment property so we can buy another house to live in?


    Thanks.
     
  2. Otie

    Otie Well-Known Member

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    You can definitely turn it into an investment property and withdraw the equity to buy yourself a property to live in:) Speak to a broker and get the ball rolling:) You are in a great position to have a fully paid off mortgage:)
     
  3. Marg4000

    Marg4000 Well-Known Member

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    Your husband is correct.

    You have two choices.

    1. Sell the house and move on. You may take a loss on the sale but will have the capital to buy again.

    2. Keep the house and rent it out. There is no way you can make any borrowing tax deductible if you intend to buy another home to live in.

    But look forward, not back. If your house has fallen in value then the loss is set. It only makes sense to keep the house if you feel it has good prospects for decent capital gain in the not too distant future. likewise with buying in your new location.
    Marg
     
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  4. Marg4000

    Marg4000 Well-Known Member

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    Sure you can.

    But the new borrowings will not be tax deductible, which seems to be the quandary.
    Marg
     
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  5. geoffw

    geoffw Moderator Staff Member

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    The problem is, that as the original house is owned outright, any more borrowings are for a new house to live in, and are not tax deductible.

    There is one way that you can make the borrowings tax deductible, but you would have to take a hit.

    Set up a trust, and sell the house to a trust. Pay the stamp duty, which may be not inconsiderable- but at least you won't have CGT to pay.

    There are other potential downsides to this strategy as well- but it may be something to get professional advice on.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  7. Marg4000

    Marg4000 Well-Known Member

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    We face a similar situation if we ever decide to move.

    Our dilemma is complicated by the fact that our PPOR was purchased in 1979 and so always cgt free. Also in an area of continuing high Asian demand so values expected to continue to rise well above city averages.
    Marg
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thats a good dilemma because you could move and get the main residence CGT exemption on the new property, rent out the old one without it attracting CGT either.
     
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  9. willair

    willair Well-Known Member Premium Member

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    Maybe your Husband is right,but after all those years of NG then to break even the same may well happen over the next five years ..Maybe just sit down and both be on the same page ,myself i would sell and move foward at least you will be cashed up know the mistakes you have made and the experience just use it..
     
  10. Angel

    Angel Well-Known Member

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    I would not sell the poor at a loss given we can see Perth market close to bottom or as some say, starting to rise again. Would you be able to rent it for another year or two and just suck up the tax, and rent where you live now. Are you convinced this new location is going to be your ever after home?

    Further research will show that there will be many tax deduction s against the rent, meaning the tax you pay will probably not be as much as you first thought. And possibly not as much as the loss you will take if you sell now.
     
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  11. dabbler

    dabbler Well-Known Member

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    Yeah, was going to say, a terrible situation :)
     
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  12. dabbler

    dabbler Well-Known Member

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    LOL....you say it is unfair, heaps of people and the media always crowing on about how the rules are unfair for investors.

    What you can do, is spend months here, read as much as you can, gain an understanding, then you will not think it is the end of the world as there are ways to turn this around over time.

    You will have the things you say, a non deductible new home mortgage & pay tax on your extra income, but I would say that is not terrible.

    You may want to pay someone competent to help map out a plan and path if you do not want to learn it all yourself.
     
  13. wylie

    wylie Moderator Staff Member

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    I like Geoff's idea (post number 5) especially if it is worth holding long term.

    If you think the house is worth holding long term, then what you spend on moving it to a trust will likely be recouped well and truly as time does its magic. But get proper advice because you might need to buy into two trusts to avoid land tax as time marches on.

    What it costs to move it to a trust will be the same as paying transfer duty to buy a different house anyway and you avoid agent fees.

    But it has to be worth paying the transfer due on to get a "debt" that offsets the rent going forward.

    And I cannot stress enough, that you need good legal advice. Maybe Terry_w?

    You've made mistakes in the past (and we've most of us made mistakes too - I know we have), so don't jump from one mistake into another. Get legal advice.
     
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  14. Marg4000

    Marg4000 Well-Known Member

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    Exactly.

    And worth thinking about as, if we don't go crazy, we can afford another PPOR without selling our present home. And as PPOR in joint names rent would most likely be tax free.

    A decision for the future!
    Marg
     
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  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Or even use the 6 year rule to your advantage.

    Move into a new main residence for a while and then out again back to the old one.
     
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  16. Depreciator

    Depreciator Moderator Staff Member

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    So Good Vibes, you bought a home and worked hard to pay it off in full. That's great. Well done. As people have said, you can't now load it up with debt, but you do have an asset you can leverage as opposed to selling it at what might be close to the bottom of the market in Perth.
    You were a bit vague about your circumstances, but are you okay about living in rental accommodation? What if you stayed renting and bought another property to rent out in an area you think has good prospects for growth? It would have plenty of deductible debt.
    Scott