These decisions coincided with falling interest rates, continually missing out on properties and changes in our personal financial situation.
Our ideal scenario was to be able to keep our current unit, so that whilst we were building we had somewhere to live. Also if after our new home was complete we could turn our current home into an investment property we felt that we would be better off. This led to a very steep learning curve in investments, tax implications, gearing and so on. I thought it would be good to write some of this down to help others who may be thinking along the same lines.
I felt that if we kept our current house we would have the following benefits:
- An investment property
- The ability to possibly negative gear and save tax
- Not have to pay stamp duty etc in the purchase of the new investment property
- Be able to hold on to the capital gains that we had made on our current property
- Have a place to live during construction
- Not waste the significant effort I had put into growing the lawn (albeit a little unsuccessfully at the moment)
The above point seemed to be a bit of a show stopper for us as the income alone from the investment property would not have outweighed the reasonably large interest payment that we would not have been able to declare as a loss. This problem was solved however by a savvy mortgage broker spruiking for our business. He told me about spousal transfers. Apparently you can transfer a property from wife to husband or vice versa with no stamp duty. You only needed to pay a nominal transfer fee and any legal fees about $250 in our case. This meant that I could "buy" out my half of the property from her indoors, borrow to get this money, add this debt to our existing debt on this property and use this new larger debt as a tax deductible loan. The money used to "buy" my half can then be used as a deposit on the new house.
After discussing this with an accountant, a mortgage broker and a few helpful people at the ATO this all seems reasonable. As long as we do this before we turn the property into an investment property we can set it up reasonably tax effectively. Therefore I have a few tips about keeping an existing property.
- Don't pay down the loan too much on your existing property if you eventually would like to turn it into an investment property. You can do this by using an offset and redraw facility. You will be paying off your debt but if you can maintain a reasonably high loan value (ignoring the offset but including what can be redrawn) you will be able to keep this debt as a tax deductible debt to work for you. You need to be a little careful with this as the money in the offset account should be saved and not spent.
- Keep your current house in two names and transfer it to the highest income earner before you get your new house.
- Look at lots of property investment sites to learn about things like depreciation, expenses and all of the ways to make an investment property work for you.
- Be careful about Capital Gains implications.