Buying a House as Investment or Resident

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  Skramit on 21/10/2016 - 11:24

  Yes because the interest payable on the new house would be far higher and therefore you can claim a larger chunk of interest on your tax as a deduction as it will be an investment.

  Then once you've paid off a chunk of the new property and interest starts to drop off, maybe consider the change over then and you'll no longer be able to claim the interest on that larger loan.

  It makes sense financially, but as long as you're happy to stay where you are for 3 more years :) IMO I would put quality of life ahead of money…. so there's that to consider too. So it's a big decision.

  Option A Investment interest claimable on 80K loan = $3,200
  Option B Investment interest claimable on 600K loan = $24,000

  Say you are on 100K a year salary, you'll pay tax on $96,800 if you go option A, but only pay tax on 76,000 if you go option B. That's a huge saving. Massive difference in reducing your gross income at tax time.

  Simplistic example but you get the idea.

  • 

    mb5802002 on 21/10/2016 - 12:19

    —

  • 

    modsec802 on 21/10/2016 - 13:31

    Your example makes no sense. There's this thing called rent which you get when you rent a house and you pay income tax on it, so you're not dropping your taxable income by $24k.

    • 

      Skramit on 21/10/2016 - 13:37

      No.

      Interest payable and therefore claimable on his tax has nothing to do with rent. Rental income received in my example is a side issue and of course needs to be factored in to your annual income.

      In both scenarios he will have rental income from either the new house or the old house, it cancels itself out of the equation in terms of doing some simplistic maths as per above.

      So if you still disagree, please elaborate :)

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  mb5802002 on 21/10/2016 - 11:39

  Thanks for that,
  Your're right is a big decision as I've to convince my wife for that decision too

  • 

    boomramada on 21/10/2016 - 11:55

    @Skramit is correct, just convince her how much additional pocket money she gain for shopping after each year tax return :)

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  Diji1 on 21/10/2016 - 11:46

  It's a much riskier proposition in that 1 property has to appreciate and losses, if they occur (the investment property depreciates), are magnified since you are leveraged.

  That said the returns are higher if they occur.

  Investing to offset tax should be secondary to income or asset value though IMO.

  I hope the financial adviser is suitably disinterested and not working for say a bank.

  • 

    Skramit on 21/10/2016 - 12:00

    It's a much riskier proposition in that 1 property has to appreciate and losses

    What do you mean by has to appreciate and losses? Even if the new property depreciates by 1% in year 1, he'll still be claiming a the same huge amount of interest off his taxable income. Which you have to view as an investment return.

    Of course it's bad if it depreciates but any property purchase has this risk. So it's no risker than moving in or keeping it as an investment.

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  geek001 on 21/10/2016 - 12:12

  You can probably do what your financial advisor said, but you will need to either rent out the house or leave it vacant and stay in your unit for as long as you are claiming the mortgage expenses on the house against your pay. Otherwise ATO might find out and fine you. The other thing is, you may need to pay higher stamp duty, possibly higher council rates and higher interest rate on your house loan because it is an investment.

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  mb5802002 on 21/10/2016 - 12:41

  Thanks all for comments, to clear somethings here:
  If I buy a new property I have to use all equity from my unit to borrow $700K so the loan on unit will back to $450K and loan in the other house will be dropped to around $400K.
  not sure how this is affecting your example.

  • 

    boomramada on 21/10/2016 - 12:53

    +1

    If use all your equity from your current house, that new loan is for your new property not your current property, still you cant claim on tax on equity loan. If you renting your old house :)

  • 

    Skramit on 21/10/2016 - 13:01

    so the loan on unit will back to $450K

    I'm not sure what you mean by "use all equity" or perhaps you are confused as to what it means to "use the equity". Or perhaps I'm confused what you mean in your second example…..

    Anyway…

    To buy a 700k property, you would want to aim for a 140k cash deposit right? 20% deposit. But 10% would work also.

    Using the equity in your first home doesn't mean you have to withdraw ALL of the cash you've put into the loan thus far. The equity is the bricks and mortar asset and you "use" this as security against your new home loan. You don't physically withdraw and money against your original loan unless you need to for the deposit on the second loan.

    Likely case might be this:

    1) $450k House with 80k loan remaining.
    2) Redraw $70k of this for your new house deposit.
    3) $150k now remaining on your loan original
    4) Buy your new house for $700k with a ~$630k mortgage.

    Note: If you have 70k in cash already for your new house deposit and dont need to redraw from your original loan and the original loan would remain at 80k left to go.

    (This is all subject to approval from your bank of course and how much they are prepared to loan you.)

    • 

      mb5802002 on 21/10/2016 - 13:48

      That's right, sorry for confusion.
      what you are saying is correct if I buy the second house as investment (which is adviser idea), but if I buy that as my living house then can I (or should I) redraw all the $370K from my unit loan to pay off $700K loan deposit?

      • 

        Skramit on 21/10/2016 - 13:55

        In that situation:

        New house mortgage: $330k
        Old house investment mortage: $450k

        Interest claimable $450k @ 4% = $18,000

        So it's not a bad option either, but not quite as much interest claimable as the scenario above where you'd have a $24k tax deduction.

  • 

    naritas on 21/10/2016 - 14:14

    +1

    Speaking as credit advisers who see this kind of scenario scores of times every week, the most common recommendation we see being made by registered tax agents is to set up a sub-account on the home mortgage that is sufficiently big enough to allow for the investment property deposit plus stamp duty or to cross-collateralise the existing property with the proposed purchase. Why? Because in doing so you allow yourself to borrow the full amount associated with the proposed investment, thereby maximising the deductible.

    For anyone interested to see how this would look in practice, we've uploaded a sample loan worksheet using the figures the OP mentioned here.

    Hope this helps.

    NB: Usual disclaimers apply as this info is intended to be only general in nature and is not to be taken as financial advice or as a substitute for licenced professional advice.

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  JetLi on 21/10/2016 - 13:46

  You just hope your house doesn't get trashed by tenants during that time, it's surprising how many things are accelerated in repairs when it gets rented out.