Strategy for Share investors involving Property

Discussion in 'Investment Strategy' started by Terry_w, 11th Jun, 2016.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Strategy for Share investors involving Property

    Say someone doesn’t believe in property as an investment vehicle. They may wish to solely invest in shares and exclude property. But they have to live somewhere so one way to do this would be to buy a property and then borrow against it to buy the shares.

    Example
    Joe wins a $400,000 lotto prize.

    Choice 1
    Joe buys a $400,000 share portfolio.
    He continues to pay $400 per week for a $400,000 property.

    Joe's shares grow at 7% pa and pay 3% dividends = $28,000 increase in capital and $12,000 income per year.

    But Joe still has to pay $400 per week in rent so Joe may have to earn $597 per week (to get an after tax amount of $400)

    Choice 2

    Instead of just going out and buying the shares

    Joe uses $100,000 deposit and costs to buy a property to live in. He borrows $300,000. But after settlement he uses $300,000 cash to pay down the loan and then borrows $300,000, by using redraw, to buy the same shares he wanted to buy in choice 1.

    Interest rate is 4% - owner occupied rate.

    Joe now has 2 different assets growing - approx $21,000 growth in the first year for the shares and $9,000 in dividend income.

    But he also has a $400,000 property which is also growing – hopefully at 7% = $28,000 per year. He has less shares that he would have in choice 1, but more in capital assets overall. He could even consider taking a margin loan and getting an extra $100,000 in shares. Or He could have started off with a 90% LVR loan to squeeze a bit more - LMI could have been deductible too.

    He also is saving $400 per week in rent – taking tax into account this is like a $597 saving.
    Also the property will be able to be sold CGT free at a future date.

    Joe can still get to invest in his favourite asset class, shares, but do so in a more tax efficient manner. As the interest on the loan is now fully deductible.


    Where someone already owns shares they may consider selling the shares and borrowing buying back – but they should get some tax and financial advice before doing so.
     
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  2. willair

    willair Well-Known Member Premium Member

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    That's a good idea Terry,but when one owns equities some for over 20 years now,some for $10.45 total entry costs then 21 years later they go above $95.00 while reinvesting every dividend payments add compounding then add the risk with holding highly volatile companies that can go down in value just as quickly,then selling some that were bought through the reinvestment plans 100% fully franked when they drop from 95 bucks into 72 bucks sometimes can work well around tax time,just depends on the person..
     
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  3. TheGreenLeaf

    TheGreenLeaf Well-Known Member

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    And Joe got a diversified portfolio between Share and Property, which is also better in terms of exposure...
     
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  4. marty998

    marty998 Well-Known Member

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    Did one have the foresight to buy CBA 21 years ago?
     
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  5. willair

    willair Well-Known Member Premium Member

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    I still remember the day i walk in the the cba branch,and paid the first installment at garden city 21 years ago..

    Plus my understanding on stand alone solid long term investing was very different too today,CBA went into the 60 bucks range then the "GFC" smashed it down around mid 20 bucks..

    That mid 20 bucks investment went into the 95 bucks range then went back into the low 70bucks,so who's to say the price range number of friday
    may well go above the 100buck range over time as it's happened every other time..imho..
     
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  6. Hidare

    Hidare Active Member

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    Hi Terry, it's a good strategy! I used the fund 100k of offset account linked to my existing home loan to purchase shares last year. I don't think I can deduct the interest expenses for dividend income or capital gain/loss in this financial year because I mixed the loan. I try to set up a separate loan for investing shares to minimize tax payable. Is it possible I sell the shares and pay down my existing home loan, and top up home loan with a separate loan for investing shares? My current PROP loan is Peak Performance by Homeside. Which loan product can I choose? Thanks, Terry.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes it is possible, but get some tax advice first to make sure the ATO won't apply Part IVA and deny the deduction.

    BTW - you make a mistake which will cost you about $4k in tax deductions for the next 10 to 30 years so best to try to fix.
     
  8. Hidare

    Hidare Active Member

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    Thank you! Terry. After reading Part IVA, it looks my situation won't attract the rules of anti-avoidance. But I will seek tax advice before I take action.
     
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  9. Redwing

    Redwing Well-Known Member

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    How about if someone has a PPOR nearly paid off, then buys a new PPOR and turmns the old one it into an IP

    Loan against the equity in the IP for shares?
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I just had a client in this situation. They sold old main residence to a fixed unit trust and borrowed 100% to do so. Interest deductible in their personal names. Proceeds from sale used to pay off new house loan.
     
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  11. Kmac

    Kmac Member

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    Hi Terry, I'm about to start buying and selling shares using an $80k split ($0 outstanding) I have against my PPOR loan. From my understanding I can then claim the interest as a tax deduction for this split when I buy shares. For eg buy $20k worth of shares, can claim the interest on the 20k. If i was to sell these shares say for 25k, I pay the 20k loan back and use the other 5k to pay down non deductible debt. No tax deductible interest to be claimed at this point as loan split is back to $0 outstanding with 80k redraw available. But what happens if I sold the 20k worth of shares at a loss, so I only have $18k to pay back the 20k loan? Will the interest on the outstanding $2k balance remain deductible? (I'm guessing not) and then if I was to purchase another lot of shares using this split would this become a mixed loan? Assuming this is the case i would always need to pay back exactly what I borrow for each lot of shares to avoid any issues. Is that correct? Thanks (and hope this makes sense)
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I think there is a tax tip on this Kmac. If you sell at a loss you can continue to claim the interest on the loan in some circumstances.
     
  13. Kmac

    Kmac Member

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    Ok I'll have a look. Thanks Terry
     
  14. D.T.

    D.T. Specialist Property Manager Business Member

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    In option 2, what was the point of using 100k deposit to buy the house then use the other 300k to pay it off? Is this materially different to just buying with the 400k?
     
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  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Just in case he changed his mind and wanted to rent it out.
     
  16. r3ckless

    r3ckless Well-Known Member

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    very good point. I guess the best reasoning behind this was to obtain credit at owner-occupied rates!
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    4 reasons

    1. After moving in he may decide he don't like it and want to move out
    2. Lenders don't like large cash outs
    3. Lenders don't like lending to people buying shares - they may want something from a financial planner such as a letter or SOA.
    4. And to get owner occupied rates.
     
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  18. Anne11

    Anne11 Well-Known Member

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    Hi @Terry_w ,

    I have a quick question hope you could help pls.

    I don't have non-deductible debt and have an offset account against the IP loan. The fund in the offset comes from extra payments we made over time.

    Is my understanding correct to say that I can use the fund in the offset to pay for my personal expenses and the interest incurred would still be deductible against the IP?

    I also use the fund in the offset to buy shares in the Family Trust, would the interest incurred be claimed against the IP?

    Many thanks,

    Anne
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Anne See
    Tax Tip 82: Taking money from an offset account on an IP and Claiming Interest https://propertychat.com.au/communi...-account-on-an-ip-and-claiming-interest.6012/

    What you are doing with the trust has many potential issues.
    You are removing cash from an offset account so the interest on the loan being offset increasses as per tax tip 82.
    But you need to document the money going to a trust as either a gift or a loan.
     
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  20. Anne11

    Anne11 Well-Known Member

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    Thanks a lot @Terry_w . My tax accountant has advised to treat the fund from the offset to the trust as a loan.
     

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