Each month our panel of tax, property and finance experts answer readers questions. You can submit your question to editor@PropertyUpdate.com.auMore of your questions are answered in our July edition of Ask the Experts. From taxation and finance to the best strategies for success, if you have a question for our experts, please send it to editor@propertyupdate.com.au and we will endeavour to answer it in one of our upcoming newsletters.
To pay or not to pay?
I have a couple of questions regarding selling investment properties at retirement and living off the proceeds.
But firstly a little about our situation. I will turn 51 this year, my wife will be 44. I plan on retiring as soon as I am 55 to maximise my Superannuation. I have worked for a Govt Department for over 30 years, so will have a decent payout/pension from that anyway. Now we have 5 investment houses, currently valued at a total of approx $1.8m, loan totalling $755k. One of these properties was our PPOR until 1996, and as we have had no other PPOR since, I believe we can use this one as our PPOR till 2002 therefore reducing the possible capital gains tax on it.
My job has supplied a property in which to live since 1996. Houses are located in Canberra (PPOR), Brisbane, Adelaide, Townsville and Cairns. We like the idea of retiring debt free so are considering selling all or a couple to eliminate the debt, and purchasing the house we wish to retire in. If I retire at the end of a FY and defer my pension for a year and sell all houses in that year, I have roughly worked out I would have to pay CGT of approx $120k and have close to $900k left to purchase a house and invest in a second small pension.(these are on today's figures)
Does this sound any good??
Are there any ways of reducing the Capital Gains Tax payable??
Is there a better option?? As mentioned we like the sound of 'No Debt'.
Regards
Ashley
I personally would not pay the Government $120,000 especially when there are other options. Why don't you retire the property with the least CGT and keep the others and draw against the equity to live on. The fear of debt is simply a mindset thing. If you view each investment property as your "Super" which can be drawn down to nothing (or at least down to 20% equity), not dissimilar to your traditional Superfund which is also drawn down to nothing over time. The only difference is this is made up of an investment property and debt and tenants all wrapped up in one and that whole package is your Superfund. Paying down your debt reduces the size of your assets. As you know the larger the size of your assets the more money you have working for you.
Regards
Edward Chan
Chairman – Chan & Naylor Australia www.chan-naylor.com.au
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Rent or buy?
Would there be any advantages to renting our home out and renting somewhere else to the same weekly rate. I am desperate to move but with the fallen market value and the ten years of refinancing if we sold we would walk out with nothing especially after real estate costs. Are we better off changing our home loan to an investment loan? Or does this make no difference and do we need to get a valuation done? It will be through a agent so can we claim that back on tax? What can we claim back on tax? Will there be a tax bill?
Thank you for your time
Teresa
It's best to rent out the home you are living in and rent somewhere else yourself. Under no circumstances should you sell it. The current climate will blow over and is already showing signs of doing so. We have worked out on an average $500,000 home you should save around $250.00 per week by doing this. You should get a valuation of the home (just a drive by from the local real estate agent but have him write it down for you) and have a Quantity Surveyor prepare a Depreciation Schedule for you.
Regards
Edward Chan
Chairman – Chan & Naylor Australia www.chan-naylor.com.au
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Tax laws?
I am working overseas now for almost 6 years and in that time have rented out my private home. I understand that you can only rent it out for 6 years and then the tax law changes with regards to the property. Is that correct.
What happens after that?
I envisage being overseas for at least another year so what will I do with my home in the meantime. I really wish to keep renting it out as I need to income to top up the mortgage.
Thanks
Wendy
Yes that is correct. To restart the 6 year exemption you need to move back into your home for at least 3 months. You may need to kick the tenants out for a short period, move back in and restart the 6 year exemption.
Regards
Edward Chan
Chairman – Chan & Naylor Australia www.chan-naylor.com.au
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What's hot?
I often read about property hot spots. Could you please explain to me what these are and why they occur?
Thank you
Belinda
Property hotspots are areas that have a sudden surge of price growth and, at least in the short term, out perform the average growth for that area and outperform the surrounding areas.
As much of our general property market has lost its lustre, some investors are looking for the next "hot spot" – an area where the next growth spurt is likely to occur.
What makes a hot spot?
It always falls back to the fundamental drivers of property price growth, which are of course supply and demand.
When demand outstrips supply property prices and rents are forced up creating what some investors call a hot spot.
So a hot spot will provide better than average growth in the short term and have the potential for consistent growth in the next 2 to 5 years.
In the past hot spots have been driven by spurts of increased population growth driven by things such as:
1. Australia's mining boom with the resultant increase in the population of small mining "boom towns."
2. The desire for coastal living and a better "sea change" lifestyle.
3. Major transport infrastructure changes, such as new roads or trains creating easier and faster access outlying areas.
4. Urban renewal such as happened in most of our capital cities where what was previously waterside industrial areas have been turned into new prestige residential locations.
5. Suburbs adjacent to high growth areas where the "ripple effect" increases their value. In general property booms begin with prime suburbs, often in the inner city or by the water. As they become unaffordable, buyers seek less expensive property nearby and the growth ripples outwards.
Identifying hot spots is only half the battle. The next step is buying the right property at the right price, but that's the same as anywhere isn't it?
Regards
Michael Yardney
Director – Metropole Property www.metropole.com.au
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Refinance? Consolidate? Sell? Help!
My name is Susan and I have to make a very difficult decision and need some guidance.
We have three investments.
The first is a home in Rye Victoria with two houses and one title that cannot be subdivided but we collect a rental per week of $340.00 on both rentals combined.
The debt is $197,000 which is currently on an interest only fixed term due to transfer over to a variable loan in April.
The 2nd home is our family home in Greensborough Victoria owing $60,000 with a rental income of $1600 a month approx. $430 per week.
We rented this house out and moved to Geraldton in WA and bought a house for $350,000 interest only with repayments of $530 a week and we live in this house now as we were renting.
We have a debt of $216000 on our $226000 line of credit owing which is on a variable.
We are thinking we will have to sell what was our family home in Victoria which means if we ever went back we may not be able to afford to re-buy there.
The line of credit is our biggest killer and by selling the family home we would make enough to clear the line of credit and the existing $60000 owing on the family home and enough to bring the debt of where we are living now in Geraldton to at least a $125000 loan that is manageable along then with the debt of Rye which is self sufficient with the rental as our investment.
Should we just refinance all the loans and consolidate the debt to be able to keep our home in Melbourne which is now valued at $515000 and refinance to have our line of credit put onto that loan and are we allowed to do this and claim the interest back on tax if we are using this as an investment property and how do we go about it?
Or should we just give up, bite the bullet, clear the debt, sell and keep Rye in Victoria on the beach which is rising in value and keep our house here in Geraldton which hopefully will appreciate in the next few years and concentrate on killing some of the debt on what is now the home we live in.
We are desperate for some help and feel we have nowhere to go with this.
Yours sincerely
Susan
It is difficult to give you any specific and accurate advice based on the limited details above. However, the most important thing is to not take any silly risks. Borrowing more and using the surplus to assist with repayments can be risky. What happens if interest rates stay relatively high for a long period of time? What if property values stagnate which freezes the amount of equity you have? Employing this interest capitalisation strategy is okay if you do so because of choice, not because it's the only way you can hang onto the property. Rolling the dice and borrowing more to help you meet repayments could end up being a costly decision – you could end up losing all your properties. If I was you, I would be more inclined to sell one property rather than risk getting into further trouble.
Regards
Stuart Wemyss
Director – ProSolution Mortgage Brokers www.prosolution.com.au
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Mind the gap!
We had a home with a mortgage of around $140 000 – we decided to buy a block of land ($180 000) and build a new home – our building society gave us a bridging loan of around $262 000 (based on security of old home which was valued by them at $365 000) and a mortgage for the new home of about $240 000 (in this process our old home loan of $140 000 was cancelled) – what were really trying to do was to build a brand new home, sell our old one (8 years old) and have a mortgage at around $200 000 which we could comfortably afford
We have tried to sell our existing home/ house – but the current market has seen prices drop (as has ours) and we are not willing to "give" our old home away – it is not a bad house to buy – we have in fact had one buyer sign a contract but pulled out in the cooling off period – but people appear to be running scared of committing themselves – out bridging loan expires in 6 months and must be settled then – we already have had a 6 month extension
The basic question is this - if we move into the new home which is being constructed – can we put the out standing bridging loan on the "old house" as an investment loan – interest only - which we will no longer be living in and then use this as our investment property and begin to negative gear?
If you could assist with advice in some way it would be most appreciated.
Robert and Wendy
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Hi Robert & Wendy
It is generally a tough thing to juggle the upgrade of a home. It is the purpose for which loan funds are used which determines whether the interest is deductible or not. I note that you have two mortgages for $262,000 and $240,000 which were used to repay your old home loan of $140,000 and fund the construction. The amount used to fund construction of $362,000 ($262k + $240k - $140k) is not deductible. The old amount loan amount will be tax deductible should you tenant your old home. You should approach your lender as soon as possible and request they convert the $262k loan into a normal term loan (with a 30 year term). They should be able to take into account the future rental income from your old home. If they do not approve this, you may have to approach another lender or mortgage broker. Good luck!
Regards
Stuart Wemyss
Director – ProSolution Mortgage Brokers www.prosolution.com.au
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