Hi everyone
A family member recently passed away and I got a small inheritance from them, enough to seriously consider buying an apartment.
But when I was telling my mum she said that even if I could buy an apartment outright I should still get a bank loan for the tax implications. Wondering if anyone can clarify the tax difference between buying an apartment outright or via a bank loan. I make around 55k a year if that helps.
It's enough to buy a unit outright. So anything from $400k to $1.3m.
Will you be living in the apartment, or renting it out?
What else did your mum say? Because if that's all she said, she has no idea what she's talking about.
Dinners almost ready
It’s called negative gearing. Otherwise buy it outright.
Read up on it, you might be able to teach your mum a thing or two.
Most apartments yield around 7% but capital appreciation is non existent. OP's mum is probably thinking about negative gearing but in theory because interest rates are 2% fixed you'd borrow the money to invest in say shares and making 5% difference.
Using the offset on your resident to fund share investments would mean the interested is not tax deductible though. Probably more than made up for by the lower interest rate compared to borrowing for shares directly.
If you borrow $100k. $100k sitting in offset. You take the $100k and bought shares. If you declare income on your shares to the ATO and claim the tax then what is the ATO going to say: thank you for the income but disallow how the shares came about which is from borrowings?
If ATO gets pissy then tell them you sell the shares yield 7% and pay off your loan so they can get $0 tax, might even take you down to a lower tax bracket. It isn't magic money and I am sure ATO knows how to make a buck.
@netjock: The way the ATO works it out is the interest on a loan is only deductible if the loan is for income producing purposes. You can't claim interest on borrowing for your principal place of residence. So if you are audited ATO will not allow deductions on the home loan.
It is based on what the money is borrowed for, rather than what it is secured against, though, so if you bought the shares at the same time you took out the loan it would be deductible, just not if it is done later. Does get a bit complicated. They treat an offset differently to a loan, which is why it is great if you turn a PPOR into a rental property later. So if you want the loan to buy shares, you need to make sure you can prove that was the purpose of the loan.
Kind of a stupid system, but it is what it is. I only know because I made the mistake of repaying my first house early, then redrew to buy another house to live, in, and found I could not claim the interest as deductions even though the first house was now an investment. If it had been an offset account I would have been fine. Can't take out a new loan on the investment property because you already own it.
You can't claim interest on borrowing for your principal place of residence
I am not talking about principle place of residence. Why do you always go on about principle place of residence. Almost nobody buys an apartment for PPOR. Most people buy it as an investment.
Kind of a stupid system
Did you actually get audited by the ATO?
It depends if you intend to rent out the property or live in it yourself. Either way, you are better off paying a 20% deposit from your inheritance and then getting an 80% loan for the balance. Then put your spare cash from the inheritance into an offset account against the loan. That way you have maximized your tax deductions if the property becomes an investment in the future because you can claim the interest as a tax deduction.
Best comment so far
I like yours though.
If you have enough in offset to get rid of the interest then you aren't paying any and there's nothing to deduct.
If you're paying interest (so not all in the offset), you don't get it all back by making it a tax deduction, so you're losing money overall vs paying for it in cash.
I think the real reason to have a loan and put the rest in the offset is so that you have access to an easy loan in the future with no paperwork (simply withdraw the offset and pay whatever the interest rate is).
Problem for OP would most likely how much will the bank lend given $55k income which I would think might not be all that much.
A few things:
- What Quantumcat said.
- On $55k what tax are you really saving? Negative generally only worthwhile for higher income earners.
- The capital growth of apartments are non-existent and the net earnings on apartments are pretty low.
Only worthwhile if you want to live in it for convenience but then it rules out deductions albeit small.
Actually if you are on a low tax rate apartments are not a bad option. Unfortunately you won't be very interesting at dinner parties. Who cares about positively geared 7% yield when you can tell a whooper like you paid $300k 10 years ago and now it is worth $1m but leaving out the fact that you've been cash flow short and suffering ever since.
At 2% interest rates on $1m borrowed over 30 years the interest would be about $400k. It has gotten to the point where the government are the only winners now. We're all just paying off capital we can barely afford looking to see whether the $1m would be worth $2m or $3m. I am wondering if our salaries will double or triple. I sure haven't seen it happen.
try getting 7% yield in syd.
@Pufff: True.
You know what happens when yields get so low all people are looking for is capital appreciation. It becomes a ponzi scheme pretty much. Requires a bigger fool to come.
@netjock: Hence I said it wasn't really worthwhile.
Although for property to fall in Aus there needs to be something worse than gfc with politicians having around 4 properties each. There's nothing they won't do to keep it growing. Just look at tim wilson.
dont buy outright for the following reasons
1.) you can simply offset the difference and achieve same thing, but this allows the following the ability to move money to a future house and use its offset and allow tax deductions on the aprtment when renting out. Also allows you to stop working and ig you want to chill for a bit, and survive by dipping into your offset if you need too. If you need a quick 50k for that enlargement operation enlargment you wanted, you don't need to goto bank to get it, its already there
2.) banks holds your deeds for a modest home loan fee.
3.) opposite of 1 is if you want to invest in shares and claim a deduction on the money invested you could outright buy apartment then borrow against it.
ultimatly depends what your plan is and given you may never 100% know i would go with 1. you can always pay it off in the future, but once it has been paid off you lose option number 1
1) having a loan isn't what allows you to have deductions, you can have deductions with a fully paid for apartment (eg body corporate fees, rates, maintenance)
But yep your other point about being able to get a loan at a moment's notice (withdrawing the offset and paying whatever the interest rate is) is a good reason to have a loan instead of paying for it outright (which locks all the money away forever until you sell it).
But you can never move to a new place and take your offset dollars with you.
Can’t borrow the money again and claim deductions against what will become the investment property.
Loan is a significant deduction, and with negative gearing this allows you to maximise the tax benefit.
Tax deductions mean you are losing money. If you have a way to positively gear that's always better. (Assuming talking about buying the same place, if negative gearing would let you get a place with higher capital growth than what you could get if you stuck to being positive that's better of course)
If you can buy a house I'd do that. Not because I like them but because there is enough idiots rushing in that in the next 2 - 3 years you might actually make a $100k - $200k.
Apartments are for yield. You're just securing a 7% gross return on your money. Given you then take out body corporate etc you'd be better off investing the money into the sharemarket index for ASX200 or S&P500 or global index.
If you are on a reliably steady (for the next few years) 55k, don't buy an apartment. Instead, buy the cheapest actual house that you can afford, on actual land. You will definitely look back on that as a good move in the long run, even if you have to borrow quite a bit now to do it; particularly because interest rates are so low and will be for the next few years. Compared to owning an actual patch of LAND, and NOT being answerable to anything even remotely like a 'body corporate' or anything like it, living in an 'apartment' will forever seem a bit like you are perpetually renting. And what do you actually 'own', as an 'apartment owner' …? A somewhat hypothetically-defined/valued little 3D 'rectangular prism' of volume in the sky somewhere?!? Then there's all the other drawbacks (potential hidden nightmares/shared costs, no garden of your own, etc., etc.). F**k that I say!
Forget an 'apartment'.
Borrow what you need to to add to your current capital, and buy some actual land with a house on it. Even a crappy house, if that's the best land you can afford. You can always fix the house up later. Buy some LAND.
Houses and land have some drawbacks. More maintenance and grounds to maintain. It’s not all gravy.
That's true. But you are paying for it when you own an apartment. You don't have to do the organising yourself but you're paying someone to organise it for you as well as paying for the actual maintenance. The only advantage in terms of maintenance with the apartment is you get a bit of economy of scale. If there's a electrician fixing something at least they're fixing it for lots of people and you all just pay a bit of it
also land tax if youre renting it out
Even a crappy house, if that's the best land you can afford. You can always fix the house up later. Buy some LAND.
Soon we will just be flipping land with no houses on it for a profit, tell people to bring their own tents.
Fact is nobody wants to fix up rental stock. Few people can afford to rebuild on their own block. Now it is down to the developers and soon at these prices people would be tapped out therefore no new developments either. We're is a squeeze.
Compared to owning an actual patch of LAND, and NOT being answerable to anything even remotely like a 'body corporate' or anything like it, living in an 'apartment' will forever seem a bit like you are perpetually renting. And what do you actually 'own', as an 'apartment owner' …? A somewhat hypothetically-defined/valued little 3D 'rectangular prism' of volume in the sky somewhere?!? Then there's all the other drawbacks (potential hidden nightmares/shared costs, no garden of your own, etc., etc.). F**k that I say!
Obviously somebody who hasn't owned an apartment. I'm not going into the finer detail. As a house owner you would be overseen by the local council. I remember a conversation on here where councils are using sat / aerial imaging to catch unapproved sheds and fining people then asking them to take it down.
Depends on how much the value of the apartment is.
Like others have said you're better of buying land or a house so you get capital gains over the long term.
So when you get a loan, the interest portion can be used to reduce your taxable income. You also need to add the rental income you earn to your income. This only applies if it's an investment property and doesn't apply if you live in it.
Can someone please explain how it's advantageous to have a loan when renting out? What's the difference between renting out a place when you own it and renting out a place when the bank owns it? Is it just that the interest of tax deductible or am I missing something.
I really think you need to see an accountant. You've had some advice here but you need someone to run the figures to determine if it is worth it for you. At $55k, you're not paying all that much tax and you also need the cash flow to support negative gearing.
There are plenty of resources to help with this, but I'd start with a professional. You need someone to tell you if it's worth it FOR YOU.
That's pretty much it.
You're better off focusing on your career to increase your income.
You need to educate yourself about money some more before you start eyeing off anything to buy.
For most people, wealth builds slowly and we have plenty of time to learn things. The inheritance means you need to bring things forward on the knowledge front more quickly.
It’s a bit of a muddle you need to work through, and any number of opinions to wade through. A good accountant can be a help IF they are someone who can teach you. Then you can start to work out what’s best for YOU.
Someone has cared enough about you to remember you and leave you a gift that can really help you along in life. It’s not unreasonable that you exercise diligence in working out the best way to use this for yourself.
Remember - you need knowledge, not just advice. Give yourself some time to learn as it’s no failing on your part that you are unsure. Maybe a good start is asking your mum why she says that and confirming this to your own satisfaction.
No advantage except being able to withdraw money easily if you have an emergency
Yeah agree best to see an accountant for definite professional advice
Just the interest is tax deductible.
If you borrow $100k assuming 2% then your interest is $2000 (for simplicity) claim it as a deduction against income from the property. If you are on 19% tax then you will not have to pay tax on 19% of the $2k ($380).
In short, it’s not so much advantageous now, but in the future, if you want a loan for personal use, this is where it becomes an advantage.
Currently, if you go for a loan with a 100% offset and park the funds into the offset account, there’ll be no interest charged(due to loan being fully offset). As such no interest to deduct against your tax.
HOWEVER, where it becomes advantageous is in the future when you want to buy a house to live in. You can then withdraw the funds from the offset and use for personal use. At this point you’ll be charged interest in the existing investment loan. This interest is now tax deductible.
If you buy outright now, then borrow for personal use in the future, you won’t be able to claim a tax deduction on the personal use loan.
The issue you’ve got is, you probably won’t be able to borrow too much on an income of $55k.
But seek advice from an accountant.
A fool and his money are soon parted. Don’t go out on a binge just because you can.
YES SPEND IT ALL AND BECOME LIKE US!
Keep the money… buy the property on finance…. rent out…. at the end of the day you have both asset and more money in your bank
I'm looking for a place to live in.
How much is the inheritance?