Would you sell or keep

Hi everyone,

After a long spell of looking for an upgrade, we finally bought a house last week! Both the wife and kids are really excited with the new house. We may have bought at the top of the boom (and the mortgage is big ) but overall we are happy and looking forward to making it our new home.

The question now is what to do with our current apartment. So I am hoping for some opinions from the forum - what would you do if you were us.

To give everyone some background, the 2-bedroom apartment is located in Hillsdale in NSW. The apartment is part of a 12-unit block, which was built circa 1965. It is very close to shops (Southpoint and Eastgardens) and public transport (5-6 mins walk to the bus stop). We really like the place and the convenience - we wouldn't move if it were big enough for us.

On the finance side, our existing P&I loan on this unit is approx. $184k. We would probably get $450 per week if we rent it out and around $600k if we sell.

With the new purchase and if we are keeping the existing unit, we are almost at our borrowing capacity. If we are keeping the unit, we will not be able to invest anytime soon. In addition, there are a lot of new apartment blocks being built in and around Hillsdale at the moment so we don't know if there will be any more capital growth with the unit.

One thing I'd like to add which may impact on the decision is that I am on the high income brackets and would really like to be able to leverage some tax deductions through investment.

We would love to hear your thoughts on this scenario.

 

Congratulations on the purchase of your new home

Check out capital gains tax exemption for main residence.

It makes sense to sell if

1) there's no capital growth to come due to the sydney market being at peak
2) you get the gains tax free
3) the fact you will be paying tax on the rental profit (as the unit will be positively geared)
4) Lastly the gain on sale will enable you to bring down your owner occupier debt
5) free up borrowing capacity

Selling sounds like an attractive option

 

I tend to agree with the twins - you’d likely be better off selling, paying down your large PPOR debt and then using the equity to further invest elsewhere.

Or if you’d really prefer not to sell, you could look at potentially transferring ownership to your partner if they don’t work - that way minimal tax will be payable on the rent.

 

If you do keep it, the property will probably be positive geared. Consider transferring the title to the person with the lower income (instead of holding it jointly). This may give you a more favourable tax outcome - discuss it with your accountant.

 

Unless the unit has some unique features, I would be inclined to sell.

The time it was a PPOR will be cgt exempt which will reduce possible tax.

You can then make a significant payment into your mortgage if you want to reduce monthly payments, (or offset if payments are manageable and your family is disciplined and won't touch it).

A future IP can they carry a much higher mortgage.
Marg

 

Who owns the unit?

You could sell now, sell in 6 years, or keep or a combination.

 

Thanks for all of the replies so far. The wife and I are the joint owners of the unit.

I saw an accountant last week to see if we can negative gear the unit. He suggested that we may be able to do it by topping up the current loan amount. This confused me a little as I have always thought regardless of the new loan amount, we could only claim tax deductions against the interests of current balance of $184k.

 

That is a shame. If single owners one could have sold 50% for full market value to the other without stamp duty or CGT. And the buyer could have borrowed to buy the 50%. Consider this for the next purchase.

Accountant is wrong or you misunderstood - probably wrong.

 

Correct.

 

How do you know that?

We don't know how the loan was conducted. All we know that the current loan is $184k. This could have been used to buy a boat, or property purchased with cash and loan later taken, or loan redrawn from several times.

I think it might be better to say the maximum that could be deductible against the rent is $184k, but it could be lower.

 

Agreed. We don't know the background of it all. It is deductible, if it is to do with the property itself.

 

again, this is not necessarily the case. It would only be deductible if the funds were borrowed to acquire or improve the property.

Best for brokers not to give tax advice I think.,

 

I'd like to clarify that the $184k is the remaining balance of the initial loan that we took out to purchase the unit.

So the advice from the accountant was incorrect as I suspected. He also mentioned that I could claim against depreciation of the unit. Would this also be incorrect due to the fact that this was built in 1965?

 

in that case the interest may be deductible.

Yes you could claim depreciation on fixtures and fittings and any newer building works.

 

Anyone knows the Hillsdale area can comment on the capital growth aspects?

My wife and I have a little debate on this topic at the moment. She thinks there will still be growth, in particular once the Meriton development in Pagewood is completed,. Her basis for this argument is in that there is currently a massive gap in the sales prices of the new and the old apartments so the older ones still present great values.

 

Think of it this way:

$500,0000 property with $200,000 loan. Sale results in $300,000 freed up.

$300,000 x 5% = $15,000 in saved interest per year if you were to pay this off the main residence loan.


So it might be better to keep the original property if it grows more than $15,000 per year.

15,0000/500,000 = 3% pa growth

You will also have rental income as well by keeping the property.

So do you think long term it will grow more than 2 to 3%pa?

 

I think I would:
1. Sell original PPOR (no CGT).
2. Place proceeds of sale into new PPOR mortgage (to reduce non-deductible debt).
3. Take out a second I/O loan against the equity in new PPOR in OP name.
4. Buy an IP (preferably newish house with largest land component as close to CBD as possible) in a likely high growth city (say, Brisbane) in OP’s name to maximise tax deductions (interest and depreciation).
5. Place any spare, personal cash in an Offset linked to the first loan (non-deductible debt).
6. Sit back and listen to the cash register ring.

That is what I would do. But I am not the OP, I am not a fin planner, I am not an accountant, I am not a lawyer, I am not a mortgage broker, ...

So, I can’t give advice but that is my opinion.

 

Its all about supply and demand. The more the supply, the more it will impact the prices for the worse.

 

So Terry, if they sold within 6 months of the new PPOR purchase there would be no CGT, is that correct? If so I would agree with Kierank.
You want your PPOR to hold minimal debt (as it is considered bad debt since it is not deductible), and the current or future investments to hold most debt (as it is good debt and deductible).
Also, I wouldn't just invest for the main reason to negative gear, check that the investment makes sense, so in around 5 years it should become neutral or positively geared (really depends on investment strategy on properties!). Why would anyone like to make loss after loss each year just to claim tax, the aim for me would be to build a large asset base of well located IPs...
I am unsure how old they are but I would ask "what are your goals, what do you wish to achieve from your IP, one or more down the line, or are you close to retirement?". Different timeframes can suggest different strategies....so very hard to advise.

 

Hillsdale is developing and becoming nicer. Its the cheapest of the Easter suburbs. British american Tobaco site is going to be the next Zetlnad. Will attract further growth. Will be slow over the next few.years.

Needs better transport although plenty of buses from Easrgardens