Your property questions answered

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1 Your property questions answered I'm 34 and I have $150,000 I would like to invest in an investment property. Should I put the $150,000 into my home loan and draw down as an interest-only equity loan to claim the payments as tax deductions, or should I use the $150,000 as deposit and borrow via a new interest-only investment loan? The first option seems to be the logical one to take but I'm worried I may have missed something. You should be trying to maximise your deductible debt and minimise your non-deductible debt. Pay the $150,000 off your home loan and then borrow 100 per cent of the purchase price of the investment property. I earn $60,000 a year and am interested in buying an investment property. My brother wants to rent the property from me. Should I use a home equity loan? You could have your brother as a tenant and claim all the relevant tax concessions, provided the transaction is made at arm's length and he pays normal market rent. You maximise property profits by gearing so I suggest you take out a home equity loan and borrow the entire purchase price of the house you intend to buy, if you can handle the repayments. I am 32 with a mortgage of $120,000. I pay $1000 a month repayments and have about $600 month to invest. Should I pay more off my mortgage or put more in my super? Placing money into superannuation is highly effective, but because of your age I would rather see you adopt the dual strategy of speeding up your mortgage repayments and at the same time putting more money at work for you. Increase your mortgage repayments to $1400 a month which will have the loan paid off in 10 years with minimal interest and then talk to an adviser about borrowing $50,000 to invest in good-quality share trusts. The interest will be a tax-deductible $300 a month, which should be well within your capabilities. My husband and I are 35 and 45 respectively, with two young children. Our house is worth $500,000 and we have $20,000 left on our mortgage. We also have $80,000 worth of business loans against our house. We recently bought an investment property costing $300,000 that we rent out for $360 a week (repayment on this property is $2100 a month). What strategy should we take in paying off our liabilities? We would also like to buy a bigger home soon. Provided you can do it without incurring massive fees, I suggest you convert the loan on the investment property to interest-only to maximise the tax benefits. The money saved in monthly repayments should then be used to speed up repayments on the non-deductible housing loan. Then you will have a bigger deposit when you change residences.

2 I wish to enter into a reverse mortgage or home reversion scheme. I am cash-strapped and wish to enjoy the rest of my life and also help out my children financially. My property is valued at $700,000 but is mortgaged for $200,000 as I went guarantor for a home loan for my daughter. You should ask your daughter to talk to the lender to try to have the guarantee removed. Alternatively the reverse mortgage provider may be able to refinance your daughter's home without a guarantor. My husband and I rent an apartment in Sydney but plan to move back to Brisbane in the next five years. We earn $100,000 a year, have $10,000 saved and have been lent $20,000 interest-free from my parents to go towards a home loan deposit. We're thinking of buying our first property for about $330,000 in Brisbane now, with the intention of renting it until we move there. My concerns are that we won't be able to afford to buy close to the city if we wait any longer. If we rent out the property and then move into it to live, what would be the tax position? The potential capital growth in Brisbane depends on the area you wish to buy in and only you can make up your mind about this. However, if you do think prices will rise, it is certainly a good strategy to buy now and rent the property out. The rents will be assessable and all outgoings including interest will be tax deductible - there will also be tax deductions for depreciation. If you rent the property out, and then live in it, capital gains tax will be assessed on a pro rata basis when you decide to sell. Obviously, the longer you live in the property the less CGT will be. My partner and I bought a property in July under the first homeowner's scheme. We have now decided to work and travel in Europe from January for two years. Will this affect our grant and can we rent our apartment while we are away? We need to have an agent take care of it so that issues like repairs and rent collection can be addressed by a responsible party. You must occupy the home as your principal place of residence within one year of completion of the eligible transaction and remain in continuous occupation for at least six months. This article is general in nature. Readers should seek further advice before making financial decisions. This article is general in nature. Readers should seek further advice before making financial decisions. Source: SMH

3 Avoid tax: Leave home The strategy To rent out my home without getting hit by capital gains tax if I sell it. Can I do that? Not indefinitely, but if you need to move out of your home for some years, it can be done. You probably think your family home, or principal place of residence, is capital gains tax exempt. But that exemption applies only if it's not used to produce income. If you rent it out - or use part of it as a place of business for that matter - the tax can apply. It will usually be calculated on the period the home was used to produce income or, if part of the home was used, the proportion of non-personal use. So how can I rent it out and avoid CGT? Les Szekely, the tax director at Horwath, says the rules allow a concession for temporary absences from your principal place of residence. If you rent out your home for less than six years before it is sold, you get the full exemption. According to the Tax Office, you have to have lived in the home to claim this concession. So it's not available if you buy a house, rent it out then move in later. But the six years is not cumulative. It applies for each period you rent out your home after living in it. So if you moved into your home for two years, moved interstate for four years, moved back to your home for a year, then moved overseas for five years before selling, the home should still be eligible for the principal place of residence exemption. But it would lose some of the exemption if you moved overseas without returning to live in your home. This is a boon for people who have to move around for their work, though you can't claim another property as your principal place of residence during this period. What if I leave the home but don't rent it out? Because you're not earning income from your home, the Tax Office says you can treat it as your principal place of residence for an unlimited period (again, bearing in mind that you can only claim one property as your principal place of residence at a time). What happens if I rent out the home for more than six years? If you first rented it out after August 20, 1996, the "home first used to produce income" rule will apply. The Tax Office says this rule assumes that, for tax purposes, you bought the dwelling at its market value at the time you first used it to produce income. According to Szekely, you can either get a professional valuation or calculate your own, based on reasonably objective and supportable data. He says that combined with the partial main residence exemption, this "double dip" can reduce your bill.

4 How does that work? Szekely uses the example of Louisa, who bought a property in Sydney in 1994 for $250,000 and lived there until 1999, when she moved to Melbourne for work and rented out the Sydney house. In 2006, Louisa decided to stay in Melbourne permanently and sold the Sydney home for $1.25 million in order to buy in Melbourne. She had been absent from her home for seven years. At the time Louisa started renting out her home, a valuer estimates its value was $550,000. So her capital gain is $700,000 - not $1 million. She is still entitled to a CGT exemption for six years' absence, so her taxable capital gain is $100,000 (worked out on the number of days it did not qualify for the main residence exemption as a proportion of the total number of days she was absent). As Louisa held the property for more than 12 months, she is also entitled to the 50 per cent CGT discount, which reduces her capital gain further to just $50,000. Depending on her tax rate, the maximum CGT Louisa will pay will be less than $12,000. Szekely says the later valuation would not apply if Louisa had first rented out her home before August 21, Source: SMH

5 Deal makers head for Perth It's no secret the Perth market is the most buoyant in the country and more deals involving property in the city by listed and unlisted players are expected in the coming 12 months. Listed group Mirvac has been one of the more active, buying and developing close to $400 million worth of residential and commercial sites. Investors are snapping up as many houses and as much office space as they can. There are a number of parties interested in Valad Property Group's 50 per cent stake in BankWest Tower. A survey by Elderslie Finance, titled Your Interest Spring 2006, showed that Perth was considered the best value for residential property investment by almost half of the survey respondents (49 per cent). Brisbane (23) and Sydney (10) followed, said Elderslie director Luis Garcia. "It's clear respondents aren't just choosing their state of origin - with 18 per cent being from Western Australia compared with 39 per cent from NSW and 19 per cent from Victoria, Mr Garcia said. "But while Perth is considered the best city for residential property investment, residential property in general is out of favour with investors. The asset class deemed the most appealing was fixed-interest investments such as term deposits and debentures, with 36 per cent of respondents considering them the most valuable component of their investment portfolios." Mr Garcia said this was followed by Australian shares (24 per cent) and listed property (12), which was consistent with results from six months ago. "Similarly, 48 per cent of investors considered fixed interest investments to be the safest investment in the medium term of three to five years, followed by listed property trusts (13 per cent) and Australian shares (9 per cent)." Source: SMH

6 How to take advantage of the forthcoming property boom Property booms never last, but neither do property busts. So how can investors make the most of the next property boom when it eventually comes around, as it surely will? The answer is simple. The investment strategy that has worked well for the most successful investors and will work just as well as the next property cycle rolls on is to invest in real estate for long term capital growth. And capital growth will always occur in our major capital cities in Australia with median property prices increasing by about 10% per annum over a 10 year period. Why? It's all to do with the value of the land, which is related to the supply and demand for that land. I remember many years ago reading an article written by John Edwards of Residex, It went something like this Imagine someone discovered a new island just off the coast of Northern Queensland and a number of smart entrepreneurs decided to set up business there because land was cheap as no one else really wanted to live or work there. Over time people would want to move to the island because there were jobs available there. These new residents would need to build houses. Remember, it was just a small island so after a few years the island would be full and there would be no room to build more houses. The island was now thriving and more people wanted to move and live there, but there would be no more land left to build houses. What could they do? With no vacant land left, they could only buy a piece of land that was already occupied. They would have to pay the people already living there for the privilege of moving to that island and if there were lots of people wanting to move to the island those willing to pay the highest price would get to live there. The more people that wanted to live on that island, the higher the cost of housing would be. This causes capital growth. Capital growth is highest in an area where there is a demand for property and the land is scarce. If you look at Melbourne, Brisbane and Sydney you can instantly see why house prices grow there faster than they do in regional Australia. Sydney has almost run out of land because of its geographic boundaries. In Melbourne the perimeters of the city cannot expand because of town planning boundaries. While there is a huge demand for property in Queensland and in particular South East Queensland, there is still quite a bit of land available for new housing, but as most people want to live near Brisbane or near the water, much of the most sought after land has been taken. One thing to remember about scarcity is most people want to live in the most desirable locations.

7 In Melbourne it is the inner south east suburbs and near the water. In Sydney the most desirable areas are in the harbourside and water suburbs. In Brisbane they like to live near the CBD or near the water. As our next property cycle comes around, as it already has in some parts of Melbourne and Brisbane, it will be the most desirable, the most sought-after areas that start growing first. These are usually the most affluent areas. People living in these areas can usually afford to upgrade or improve their houses. At the beginning of the property cycle these are the houses that will grow in value first. What happens to those people who cannot afford to buy in the most desirable areas? They buy in the next most desirable suburbs. This has been well documented in previous property cycles. Prices will start to increase in the more affluent and desirable areas and then start to ripple outwards to adjoining suburbs. How can investors take advantage of this knowledge? Firstly, understand the big picture. Understand where we are in the general property cycle. We are hovering around the bottom of the slump stage of the property cycle in Sydney and well located properties are definitely selling well in Melbourne and Brisbane where the cycle is in its early upturn phase. Next, become an expert in the suburbs that are going to grow in value first. Get to know those areas so you can pick the bargains in those suburbs near the city, near the water or in the more affluent, the more desirable suburbs. If you buy a good property in those areas you are likely to achieve excellent capital growth in the next 5 years. Then over the next few years the suburbs one ring further out will start to make good investment sense. It is only near the end of the cycle that the outer suburbs, those that have traditionally been first home owner areas get good capital growth. The spread of capital growth from the inner to the outer suburbs is called the ripple effect. You can share the above information with your family members, relatives, friends and colleagues. However, if they would like to receive our Property & Finance Matters directly, please just ask them to send us their names and addresses. Our address at Golden Gate Finance is:

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