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Strategy: Rent and Maximise CGT concessions to Pay off the Home loan sooner

Discussion in 'General Property Chat' started by Terry_w, 27th Nov, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Strategy: Rent and Maximise CGT concessions to Pay off the Home loan sooner

    This strategy follows on from the strategy outlined at Strategy: Rent where you live and Buy Investment Properties

    A person carefully planning ahead can maximise cash flow while at the same time minimising CGT.

    This can be done by combining a few strategies

    1. 6 year rule. See Tax Tip 23: The 6 year Absent from Main Residence Rule

    2. Moving into an investment property. See Tax Tip 86: Don’t be so fearful of generating income from the main residence

    3. Sale between spouses. Legal Tip 95: Spousal Transfers and Some of the Legal Issues


    Example

    Mr X buys 123 Smith St. He moved in for a few months and then out and went back to live with parents.

    - This allows him to claim the property as the main residence while he is absent (for up to 6 years); and

    - This gives him maximum deductibility by allowing for negative gearing;

    - And it allows him to live cheaply while saving as much of his wage as he can into a 100% offset attached to his investment property.

    He could squeeze some extra juice out of this strategy by borrowing 105% of the purchase of this property by either

    - Borrowing 25% from mum and dad, or

    - Using the parent’s loan as additional security for his loan (temporarily).

    - And other strategies as outline at Tax Tip 61: How to borrow 105% on your first purchase


    Mr X then buys another property, IP2, while still living with mum and dad. This allows him to negatively gear this one and save tax. This property is actually his dream property, the one he wants to ‘retire’ in.


    Mr X then meets Ms Y.

    - It also allows for more strategies.


    Mr X and Ms Y decide to become de facto so they move back into 123 Smith St about 5 years after it was purchased. The plan is to move out and into IP2. But before doing so they seek legal advice on their strategy. Because they live in NSW they can transfer without much costs, but only 50% of the property. If the 123 Smith St was in VIC it would be even better as the whole property could be sold to Y. This has to be done carefully or the interest will not be deductible.


    Moving back in means

    - This means it is their main residence again;

    - As it is now their main residence this means title can be transferred from X to X and Y for no stamp duty, Tax Tip 68: Transfers Between Spouses and Stamp Duty in NSW

    - and no CGT as it was always the main residence;

    - Y can borrow to acquire X’s 50%.


    Y and X get a pre-approval for the loan. X transfers 50% to Y and Y borrows to pay X the full market value of the property x 50%.

    - Once the property were to be rented out Y can now claim all the interest on her loan used to buy the share of the property;

    - X can then still claim half of the interest on the original loan as well;

    - They would also time the transfer to occur just before they moved out so as to maximise any growth in the property.


    Once transferred they are free to move out of 123 Smith St and Rent it.

    - This allows them to rent it out for up to 6 years (from date of moving out) and still claim the main residence CGT exemption.

    - more deductions are possible now, because the loan has increased

    - Tax refunds are increased and placed into the offset, not into the loan.

    - Loans are maintained as interest only so as to maximise deductions when moving out.


    If the time is right they would move into IP2, their dream home. However they may have also purchased another property, let’s call it IP3 for convenience. This may coincide to occur just after they have transferred title on 123 Smith St to both names (or just Y’s name if in VIC).


    They move into IP3

    - This allows them to establish it as their main residence

    - They cannot claim IP 3 and 123 Smith St both as the main residence for any over lapping time period, but they can decide which to choose at the sale date of the first one to sell.

    - They may even decide to buy in one name initially and then do a spousal transfer to increase the deductibility of interest.


    They wait a few more years and then move out and into IP2, the dream home.

    Benefits

    - The negative gearing on IP2 by this stage is reducing, it may even be costing them more in tax than they are saving;

    - IP2 is the dream;

    - Once in they can choose to sell one property either 123 Smith St or IP3

    - Sale proceeds could be used to pay off the loan on IP2 which is the new main residence (or into the offset)

    - They will have low or no non-deductible debt.


    IP2 will always to subject to CGT, but the impact will gradually diminish over time as outlined in Tax Tip 86: Don’t be so fearful of generating income from the main residence


    In Summary

    They can pay off the home loan sooner on the dream property without incurring much in tax or costs along the way. They should be many years ahead of the standard strategy of buying the main residence, living in it, paying it down, and then investing.
     
    Northy85 and SerenityNow like this.
  2. SerenityNow

    SerenityNow Well-Known Member

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    Wow - this is so similar to what I'm hoping to do! (Not the moving into IP's, but the moving out of ppor etc as per: Where to Start? So Many Questions!)

    Thanks for the post :)
     
  3. JesseT

    JesseT Well-Known Member

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    Great write up Terry.
    Quite relevant to my current situation-

    PPOR purchased January 2013 50/50 with de facto.
    Vacated in 2014, now IP1.
    Purchased IP2 alone in 2014
    Purchased IP3 alone in 2015

    I'm starting to think about options of what to do with IP1 as the 6 year CGT ruling approaches so that we can take advantage of the exemption, but hopefully without selling, we may wind up there again one day and it has loads of development potential.

    In this situation, when Sydney is in the trough and IP1 still within 6 years of vacate, if we get a valuation on IP1 (PPOR) and access all the equity, returning it to 80/90 LVR to put a deposit on a PPOR in Sydney-

    Will the debt left on IP1 be tax deductible? As it was not investment, it was PPOR?

    leaving us with IP1 being subject to CGT from our recent valuation only, and the potential to repeat the same process with the Sydney PPOR after the recovery?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    @JesseT the interest on the loan used to acquire the property would be deductible once the property is available for rent.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Claiming the 6 year rule is optional. But if you were not to claim it the valuation would need to be done from the date you moved out. One strategy would be to move out and then out again, after establishing it as the main residence again, and then use a valuation if it is dropping in value.