Buying out half of unit

• 

  Mikinoz on 21/06/2014 - 12:31

  +3

  First thing to check is does your sister agree to be bought out or does she have same idea as you. Sorry for your loss.

  • 

    abbeyroad on 21/06/2014 - 12:49

    Yes, she will be looking to buy her own house with her partner in the near future. Thankyou

• 

  2ndeffort on 21/06/2014 - 12:45

  +1

  Some legal advice needed I think. Not sure about inheritance laws, will you have to pay any tax on the unit? I assume you need to get the title deed changed to show only your name.

  In terms of the furniture the answer is it probably depends. If your unit is in a place where people generally prefer fully furnished and the furniture is OK then keep it. If the furniture is a bit dated and potential tenants would prefer to use their own then instead of paying your sister out give her all the furniture and ask for the value of your half of the furniture to be taken off the amount you will owe her for the unit. If you are thinking of having a real estate agent step in as property manager for you (to find tenants and manage inspections/maintenance etc) I would contact a couple in your local area and ask for their advice. They will know what gets the best rents in your area and they will possibly be keen to get signed up as property manager for you so might be happy to give some advice. Shop around though, Real Estate agents are potentially worse than politicians and call centre staff in the trustability stakes!!! Maybe compare the responses from a couple of real estate agents to get a balanced view.

  • 

    abbeyroad on 21/06/2014 - 12:54

    Thanks for the advice, I was thinking of just approaching some real estate agents, but I don't really trust them to be honest. Although you're right, I will need one eventually to manage inspections etc so it's probably a good idea. I certainly want to get educated a bit more on the topic before speaking to them.

    I'm not sure about the tax unfortunately.

    • 

      Malarkey on 21/06/2014 - 13:35

      +2

      I don't think you need to go to a real estate agent for this one. Well not until the unit is in your name and your ready to rent it out, then its up to you if you want to use a real estate agent.

    • 

      jace88 on 24/06/2014 - 12:32

      +3

      You need a solicitor.

      And in Aus there is no inheritance tax per se, but you'll need to look at capital gains… there's a few things to think about and consider (e.g. who lives in it, main residence, when was property first acquired- i.e. pre or post CGT coming into law, CGT triggers upon disposal by your sister, inheriting the cost base, etc). Definitely worth speaking to a solicitor and an accountant to help advise you on the best way to go.

      You'll then need a real estate agent if you want them to manage the tenants/rent collection/etc.

      Word of advice- keep track of any costs incurred along the way because your accountant will need this.

• 

  p1 ama on 21/06/2014 - 12:50

  +2

  I've decided financially that keeping the unit and using it as an investment property is probably the smartest idea (instead of selling).

  Not quite, you really need to leverage your returns in property in order to maximise your capital gain if you want to invest. You are better off selling this property, using the proceeds to buy yourself a new principle place of residence and then using that as collateral to buy yourself an investment property which is majority debt financed.

  Take advantage of negative gearing and load your capital gain.

  • 

    abbeyroad on 21/06/2014 - 13:07

    Thanks paulsterio. The area that the unit is based is becoming more and more popular and rising in value, so it would feel like a bit of a shame to sell. I don't quite understand what you mean, if I sold and bought myself a new place to live in, unless it was a cheap place I'd still have a mortgage to pay off and wouldn't be able to fund an investment property.

    • 

      p1 ama on 21/06/2014 - 14:50

      +26

      I'm not 100% sure on your situation, so I can't tell you too much. But essentially, you should never have a property with low debt kept as an investment property.

      I'm assuming that you are living in the unit right now and you want to keep that as an investment property when you upgrade and move to a bigger (or more expensive) house.

      So what happens when you do this is that you'll have an investment property which has very low debt and you'll have a large mortgage on the house which you are currently living in.

      That's a very bad investment strategy! Why? Because you can't claim your interest expenses against your taxable income. So you're losing out on money there.

      Essentially what you want to do is to leverage your returns, what that means is you want to have a higher debt on your investment properties so that you can take advantage of negative gearing, or at least neutral gearing. The high debt will "load" your capital gains so that you will earn more gains on your equity.

      If this is hard to understand (which I know it can be, I'm a university Finance graduate), then look at this numerical example.

      Let's just say you currently own a unit which is worth $300,000. There's no debt on the unit. You rent that unit out for $400 per week. You buy yourself a new house worth $500,000 with most of it on the mortgage and you pay your interest expenses month.

      That's bad, the interest expenses you pay there are not tax deductible. That's actually very, very bad. What does that mean?

      1) Firstly, your rent will be taxed at your marginal tax rate. Let's assume that it's 35%. So if you earn $1600/month ($400/week), you will be left with $1040 after tax. If you have to make interest repayments of $1000/month on the mortgage, then you're left with only $40. However, should your mortgage be on your investment property rather than your residence. Let's look at how much you will keep. Again, same deal, you earn $1600/month and you pay $1000 in interest. Interest is paid BEFORE tax. So your taxable income is $600/month. You get to keep $390. So see how before you only had $40, now you have $390!!

      2) Secondly, you can't take advantage of negative gearing. See what we did above, you can actually take on even more debt such that the interest expense exceeds the operating income, which means you can actually offset your own personal tax!

      Okay, so I've made a lot of assumptions and stuff, but I hope that my main point has come across. The main point is - You shouldn't have an investment property with no debt when you have a mortgage because you'll end up paying more tax.

      Let me know if there's anything else I can help with :)

      • 

        abbeyroad on 22/06/2014 - 12:21

        Thankyou again for contributing, I've re-read your response multiple times and done some research so I can get my head around it more. My situation is as follows, I'm relatively young and not looking to buy a house and settle down any time soon. I plan on working overseas and around Australia so I will be paying rent as opposed to buying a house to live in.

        So perhaps I used the term investment property incorrectly, but my (ideal) plan is to buy out the house, put in whatever money I have saved up, end up with lowish mortage repayments that, along with strata, rental agent fees etc, will be covered completely by the rental yield. That way I can go about my own business, pay rent with my own salary and when I am ready to settle down, I have a nearly paid off unit that I can then sell or move into myself. Bad plan?

      • 

        nicksinternet on 22/06/2014 - 17:47

        -3

        You want to mortgage the crap out of it (at interest only) if you are going to rent it out. Reason being the interest will be a tax deduction. Pocket the rent for yourself. You'll need to declare it as income but this at least will be offset by the interest deduction. Anyway sounds like your income will be low so shouldn't pay to much tax on this.

      • 

        akpv on 22/06/2014 - 22:07

        +9

        Is this a joke? You want to pay interest to a bank just to save on tax? Sounds like you've been to a seminar or two….

        Example A
        $400,000 interest only loan @ 4.74%
        $400 per week rent
        $400,000 in uSaver account at 4.01% (=$308 pw)

        Expenses $365 (interest)
        Income $400+$308 = $708

        Profit $343 per week taxed at 30c in the dollar = net profit $240 per week.

        Example B
        $0 loan
        $400 per week rent

        Profit $400 per week taxed at 30c in the dollar = net profit of $280 per week.

        Obviously with the first option you get $400k in the bank to invest elsewhere but you will need to pay tax on any earnings there also so unless you have a better return on investment I'm not sure why you would bother.

        Paulsterio's post makes sense but I don't understand the logic of nicksinternet's.

      • 

        p1 ama on 22/06/2014 - 23:29

        +7

        You're missing the point, akpv, the point isn't to get the cash and then chuck it elsewhere, that's just silly.

        The point I originally made was that if you have a mortgage on your primary place of residence when having an investment property that is not geared, that is a bad investment strategy.

        Let me show you what I mean.

        Okay, you have two houses, A and B. You own house A outright and you have a loan on house B.

        A - $500,000 - equity = $500,000, debt = $0
        B - $500,000 - equity = $100,000, debt = $400,000

        Let's say the interest rate is 5%, so you end up paying $20,000 in interest per year. This is paid to the bank, regardless of what you do with your properties.

        Either of these properties have the potential to earn you $500 in rent per week, so $26,000 per year.

        Now, if you decide to live in property B. So you will earn $26,000 from your investment property (property A), you pay 35% tax, you are left with $16,900 and you pay your $20,000 interest, which you have to pay on the house you are living in (B). So you end up with a loss of $3,100.

        Now, if you decide to live in property A, you will also earn $26,000 and you will also pay $20,000 in interest. You pay your interest first, before tax, so your taxable cash flow is $6,000. You pay 35% tax, you're left with $3,900. You're much better off aren't you?

        The "better-off-ness" is what is called the interest tax shield, you can calculate how much you are better off by taking the amount of interest you have to pay per year and multiplying it by your marginal tax rate, here, $20,000*0.35 = $7,000, which is what it was calculated to be (you initially had -$3,100, you now have $3,900).

        The problem with what you did in your examples was that you went around in a full circle, you didn't get taxed on the interest you pay, but you are taxed on the interest you are paid. That's silly, don't do that - get another property with that $400,000 or whatever, buy shares or something, don't just leave it there earning interest.

      • 

        tomleonhart on 23/06/2014 - 11:32

        I think akpv is saying what nicksinternet said doesn't make sense.

        What paulsterio wrote is true, but this scenario the property is positive geared.

      • 

        tonka on 23/06/2014 - 12:20

        Great idea to keep you foot in the door of the property market.

        From what you have said you need to keep in mind capital gains tax.

        If you can manage a scenario where you can rent this out to a friend, not declare the rent and call it your principal place of residence you will do really well.

        If you feel you will sell it later to live somewhere else you will be better off taking the tax free lump sum now and buy the home you will want to live in later now. That way you won't need to sell and pay capital gains tax later.

        Any scenario where you keep a property will be better than just having the funds in the bank.

      • 

        akpv on 23/06/2014 - 13:31

        Paulsterio's post makes sense but I don't understand the logic of nicksinternet's.

        I agree with you paulsterio :). I was commenting on nicksinternet post which came after the OP stated he didn't have an interest in buying his on place to live at this point in time. Investing in shares is a reasonable idea (and what I would do!) but you still pay tax on the earnings and expose yourself to additional risk although one could argue that by diversifying you are exposed to less risk. The OP has said he believes real estate is the best investment for his circumstance so why f with that and bring something else into the mix just so you can lower your tax? Paying tax is good, it means you are making money.

        I'm not sure on the rules about re-mortgaging a property if at some point he wants to? Maybe he is best off opening a loan with 100% offset account and dumping the cash in there.

        I think when you preview a post it stuffs up the threading? Not sure why it went as a reply to yours…

      • 

        Wyzard on 23/06/2014 - 13:56

        +1

        paulsterio, thank you kind sir for explaining this the way that you have. I'm generally the blue collar guy amongst white collar friends and I tend to shy away from discussing the topic of property and investments, particularly gearing due to lack of knowledge. Your explanation and examples gives a good basis. Now I can chime in like a pro… kidding.

      • 

        forever saving on 25/06/2014 - 13:00

        If you can manage a scenario where you can rent this out to a friend, not declare the rent and call it your principal place of residence you will do really well.

        I touched on this earlier. It's a good idea but ultimately dodgy.

  • 

    cuteseal on 23/06/2014 - 15:57

    +1

    I think he will still be negatively gearing because (I'm assuming) he will be taking a loan out to buy out his sister's half?

    To me, I reckon it would be better to get a smaller loan and buy the rest of the property at "mates rates", assuming it's a good property in a good location. If he sells, he will rack up real estate agents fees, capital gains tax, and then buy again at a premium and be at the mercy of the market. Plus he will be paying a lot more interest because of the bigger loan.

  • 

    [Deactivated] on 24/06/2014 - 16:50

    Take advantage of negative gearing and load your capital gain.

    There are views that we are in the midst of a housing bubble.
    Our Banks certainly profit from increasing loans to support this - perhaps to the tune of some $3,000 to $4,000 a year 'taken' from the average Oz family.
    ("Before Tax" Bank business profits being incorporated in the consumer price we actually pay for products).

    With bank shares trading at two to three times NTA on the SE, they are comparable in total to our much vaunted minerals sector. With a grossed up bank share dividend around some 10%pa - after allowing for franking credits, & growth with inflation - it is no wonder that the Liberal party is said to have over $100M invested here.
    So little chance of reverting to an historical NTA - as CBA shares were initially issued?

    Steady inflation at 2 - 3%pa, with bursts exceeding this, is a relatively recent phenomena; & with our 'individual' massive historical debt overhang, combined with long-term reducing employment prospects, deflation is quite possible.
    Capitalism relies on consumerism - but for the Oz majority diminishing disposable incomes limit this.

    Economic Bubbles have been experienced through history. Here is a link to "Tulip Mania"
    http://en.wikipedia.org/wiki/Tulip_mania

    The reference to [gold/silver] currency is also interesting - in the last days of the Roman Empire their coinage only had a silver wash. Truly rampant inflation - comparable to Germany in the last century.

    In some cases property growth at 10% a year has been used as a basis to project future capital gains.
    Even netting this of inflation at say 3%, gives unsustainable results.

    Take the home of a Dutch merchant in Amsterdam some 377 years ago - the height of tulip mania.
    With gold historically much rarer, & then more valuable [in 'real', that is inflation adjusted terms], I will simply take the value of this merchants home as equal to one solid gold ring.
    This appears a very low value; which I further reduce by just using the present day value of gold ~ $1,400/toz.

    This gold ring might be considered as equivalent to one English gold sovereign (a pound sterling) - at around a quarter ounce we have some $330 odd.
    [As an aside, from Jane Austen's "Pride & Prejudice" the very wealthy Mr. Darcy, on an annual income of 10,000 pounds would have an inputed wealth of 200,000 'sovereigns'].

    So allowing for a 'real' 7%pa compound growth over some 377 years on this initial "gold ring" we get:
    $330*1.07^377!!!

    (Oh, the power of compound interest - think of the tale of the chessboard & the grain[s] of wheat).

    Even the combined worth of our worlds three wealthiest individuals would not amount to one per cent of this calculated figure. Their fortunes are just US billions, compared to the calculated British billions ;-)

    Perhaps paulsterio might calculate a "capital growth" figure on Mr. Darcy's 200,000 pound sterling property, for the years since the novel was written?
    Using an inflation inclusive 10% pa over 150 years [??] seems to give around ten times the individual fortune for Messrs Slim, Gates & Buffet - around a paltry $USD 60,000,000,000 each :-)

    PS: Aside from any capital appreciation the return on a rental, allowing for overheads & maintenance, is possibly similar to Govt. bonds - although rent 'should' increase with inflation.

    In the event of a property crash, those with a homeowners mortgage might be expected to hang on "to grim death" with their treasured home. But landlords might well be left hanging, as renters now build or buy.

    EDIT: Adjusted formula to correct faulty recollection of computer calculations :(
    Was tempted to leave in error to see if commented on ;)

• 

  alwayscheaper on 21/06/2014 - 13:43

  +2

  Is the property under you and your sister name now?

  Check up "family transfer", I believe you can get a trusted valuer to do a lowest possible transfer price (and you deal with the market price difference with your sister aside) to lower stamp duty.

  Talk to a bank (valuer/ mortgage) or solicitor for the transfer is better than real estate agent (who can deal with rental).

  • 

    abbeyroad on 22/06/2014 - 11:59

    Great advice, will check out family transfers, makes sense.

  • 

    tonka on 23/06/2014 - 12:08

    +3

    Keep in mind this will drive up the capital gains tax if you sell later.

• 

  tonka on 21/06/2014 - 18:28

  +1

  If you use a solicitor, get an airtight fixed price or they will bleed you.

• 

  orourke on 21/06/2014 - 19:32

  +2

  See a Solicitor, if the property has yet to be transferred into your and your sister's names, you can have it transferred only into yours and pay your sister out. That's a win for you as you won't have to pay stamp duty (check with your solicitor as property and duty laws are state based)

  As with valuing the property. You can either contact a Real Estate agent (probably multiple) and get some ball park figures, or you man up and get a couple of valuations from a registered valuers, pick the average or the median price and pay up.

  • 

    abbeyroad on 22/06/2014 - 12:02

    Thanks orourke, it's already in my sister and I's name. Looks like I will have to hit up a solicitor and hopefully they can also assist in providing a valuer.

    • 

      tonka on 22/06/2014 - 12:31

      +3

      My sister just went through a similar process although with an ex-spouse, her solicitor offered to guide her through the process, offering advice on obtaining valuations, finance etc.
      When all settled he withheld $10K in fees from the finance transfer for all the 'advice she was given'. Most of the advice was not requested and she believed was just friendly conversation. Turns out the 'quote' he gave her had some small print saying it was just an approximation. He was charging $150 an hour for conversation and rounding up bigtime.
      And before anyone asks no this didn't cover stamp duty.

    • 

      whoopdeedoo on 23/06/2014 - 15:49

      find a broker/lender who'll give you a copy of the valuation report. ANZ/Homeside are two that come to mind. forward this valuation report to your solicitor. save yourself around $300.

• 

  justjules on 21/06/2014 - 21:39

  +1

  Hi OP, relatively straightforward process (i'm a solicitor) - you need to get a valuation done by a valuer for stamp duty purposes (~$500) and then register a transfer that will put the whole property into your name. Stamp duty is paid on half the value of the property, and there are potential CGT implications.

  You will need probate of your father's will to deal with the property so I presume you have already used a solicitor. That solicitor should be able to sort out the transfer for $500 plus rego fees. If you haven't started the process yet feel free to give me a PM and I'll run through things with you in more detail.

  • 

    abbeyroad on 22/06/2014 - 12:05

    Thanks jules, yes you're right we had to see a solicitor already a while back. So you're saying the valuation is around $500 and so is the transfer of the deed? Are these fees to be shared between myself and my sister or do I take them on completely seeing as I'm initiating the buy out. Could you also expand on CGT implications. Really appreciate it.

    • 

      jto00 on 23/06/2014 - 14:09

      There are no CGT implications when you buy a property. Your sister will likely pay CGT though
      Keep a copy of everything related to the property. It will make it easier when you decide to sell it

      • 

        No ONE on 25/06/2014 - 10:00

        No, her sister won't be paying any capital gain tax if the property was sold within 2 years of inheritence.

• 

  Candour on 22/06/2014 - 09:03

  the accounting may be complex on CGT etc and require lots of administration by an accountant
  sometimes it is better to sell this for this reason.
  [too much trouble to keep the records].

  if you want to invest you may need to find the best property for this purpose
  new may give you more depreciation and low outgoings.

  1. you need only 1 valuation by a valuer. not two. they cost!

  2. real estate agents may advise you on rents or sale prices of other properties if you must use them and must invest in that area. better to find the best hotspot through a reliable advisor. agents also may be compromised by conflicts of interest and give you self serving advice.

  if you find a hotspot it may be better to sell this and buy there for capital growth.

  you really need an accountant who can take you through the DCF/NPV decision.
  hard to find disinterested advisors who will give you the best advice for your circumstances. they are rare.

  • 

    abbeyroad on 22/06/2014 - 12:07

    Thanks Peccadilloes, that gives me more terms to google (DCF/NPV, CGT). Didn't think I'd also need an accountant for this one!

• 

  1bug on 22/06/2014 - 19:56

  +3

  Was the unit your father's principal place of residence?

  If so, then the property is capital gains tax-free (CGT) in the hands of the beneficiaries, provided it is sold within 2 years. If longer than 2 years & the property has increased in value, then your sister may have to pay CGT on her share when you buy her out.

  Read more at…
  http://www.smh.com.au/money/planning/negotiating-inheritance…

• 

  AMLagonda on 23/06/2014 - 00:49

  I always thought it has to be sold, I dunno just what I was told.

• 

  Blockey on 23/06/2014 - 08:54

  +1

  If you want some real help with this, please see an accountant.

• 

  Flyingmoo on 23/06/2014 - 14:03

  CGT might hit you hard later down the track, so check everything 110% before you decide to keep it. Rather than just being from the day you take ownership, CGT might kick in from when your father purchased the property, which could make your liable for huge amounts of CGT when you eventually do sell it.

  • 

    No ONE on 25/06/2014 - 10:06

    If the property is pre 1985 then cost base is the value of the property on inheritence date, otherwise the cost base is the date it was acquired by his father

• 

  ghostdom on 23/06/2014 - 14:53

  -3

  In china, well I think in Asia, we never say we are lucky to inherit something from parents passed away….. because of different culture??

  • 

    ur2dads on 23/06/2014 - 15:53

    -2

    I think it's rather distasteful in every culture - I certainly cringed upon reading that line. I hope the OP didn't mean it that way!

    • 

      jto00 on 23/06/2014 - 16:16

      +6

      I think OP meant lucky his father put himself in a position to have an investment to pass on. I didn't read it as being distasteful

• 

  noyesmaybeok on 23/06/2014 - 15:36

  Opportunity cost is your biggest problem. Although you have this "free unit that can bring in income", make sure the % return is good. The money may be better off elsewhere.

  Do sums for all scenarios and go from that. Maybe the unit is $400,000 and pulling in $400/week rent, a house down the road for the same cost pulls in $470 - so you'd be better off selling and buying that.

  Generally when buying you want a good deal (make money on the buy), if you pay your sister above what you would someone else, take that into account for % return.

• 

  00 on 23/06/2014 - 21:19

  It all works out in the wash.
  http://www.youtube.com/watch?v=Xbp6umQT58A

• 

  abbeyroad on 23/06/2014 - 22:16

  Thanks all for the great advice, I've got some decisions to make..

• 

  MITM on 23/06/2014 - 23:47

  After you're finished travelling about, you'll have a place to return to - that is a great idea, so buying your sisters half makes sense.
  As for selling to buy a "better investment vehicle", you'll have exit costs from this property and entry costs into the next, adding up to thousands.
  Your 50% mortgage expenses are tax deductible - and it may be worthwhile getting a depreciation schedule done for the property by a Quantity Surveyor, as the first 5 years ownership could provide useful tax deductions too.
  At a later stage you'll work out if you want to run it as a "business" with all the deductions etc. via a rental agent and accountant.

  However, one thing to contemplate, is the property in a good rentable condition ? You don't want to be travelling about and receiving phone calls for repairs etc.
  Otherwise I'd suggest selling your half too, and investing in something with less work - such as shares, while you travel. Term deposits not so good.
  Selling the property within 12 months of ownership will incur Capital Gains Tax - but after 12 months, nil CGT as it WAS your principle place of residence, even though you may have rented it out "temporarily" - it's main purpose was as a POR.

  As for the furniture, sell it. You may find a furniture trader that will buy the house lot - though don't expect too much, but the property will be empty ready for tenants.
  Most tenants have their own furniture. Few want a fully furnished plus you'd be liable for everything/repairs/replacement.

  Use a property valuer for a market valuation. He has experience of your situation and is independent.
  Stay away from Real Estate agents. You don't need them yet.
  Your solicitor should be capable of guiding you - if not, he can recommend or employ Jules above. I'm sure his rates are within Ozbargain range :-)

  Happy travels.

• 

  [Deactivated] on 24/06/2014 - 11:43

  You might put forward the idea to your sister that she just rents out instead of being bought out as that'd likely cover her mortgage payments.

• 

  DadBangr on 24/06/2014 - 16:38

  I just went through the exact same situation with my brother. We got a licenced valuer to value the property for tax purposes, got a figure, cut it in half then my brother went to a mortgage broker who organised the finance to pay me half the value of the property. The broker and settlement agent did all the dirty work and all my brother and I had to do was sign a bunch of paperwork. I had no idea what I was doing but it was fairly straight forward.

• 

  [Deactivated] on 24/06/2014 - 20:22

  A late correction to my earlier posting.

  Pride & Prejudice was actually written by Jane Austen some 200 years ago - so the wealthy Mr. Darcy with his imputed property worth of some 200,000 pounds sterling (or gold sovereigns) might only have been subject to yearly inflation averaging some 2.04% over the subsequent couple of centuries;
  http://www.measuringworth.com/calculators/inflation/result.p…

  Assuming an annual rate of 'real' (after allowing for inflation) property capital growth of 7% over this period would result in his property being worth some "1813 year" 150B pounds sterling - using the common US definition of billions, not the old style British billions ;-)
  200000*1.07^200

  (I seem to recall an [accounting] figure of 70 (or 72?) as a proxy for a compound interest doubling, giving around a decade for an annual rate of 7%.
  From memory the chessboard grains were doubled on each succeeding square? So starting with a single grain on the first square gives a total of 2^64 -1? ).

  Adding provision for inflation from 1813 (using the reference above) would scale this up a further 57-fold; giving a final USD figure around 14.5 trillion?
  Incidentally Great Britain apparently went off the gold standard with WW1. Some 100 years later the gold content of a pound sterling "sovereign coin" is now worth ~180 pounds sterling. As the economics website referenced above mentions, there are a multitude of measures of inflation - or the CPI :(

  Are there errors in my figures that might allow the sustained capital growth that some project?