Negative Gearing Will Not Solve Problem
Sydney Morning Herald
Tuesday April 28, 1992
QUESTION:
My husband and I live in a house in an outlying area which we bought in April 1991 for $147,000.
To pay for it, we took out a loan of $145,000 secured by a first mortgage over the property as well as a second mortgage over a property I own close to the city, purchased before my marriage.
As the country house is our own residence, we could not negatively gear it and, instead, rented out the inner city property for $240 a week which is my only income.
My questions are:
* Is there any way I can negatively gear the inner city property?
* Is it possible to put the house into a company name and then to refinance it?
* If I sell the inner city place, when the property market recovers, and pay off the bulk of the mortgage on the other house (not all in case we want to negatively gear it), would the bank release the deeds to the city house so I can sell it?
* Is it possible to retain some funds to invest in another property with a view to renovations and resale on a better market?
* Is it feasible to rent out the country house and then return to the city, and is there any other way we could use our country property for a tax advantage?
* Is it feasible to start a small business at home where we could claim a percentage of the costs but, if we did, how would that affect capital gains tax? - J.B., Paddington.
ANSWER:
The only way you can negatively gear the city property is to borrow for an income-producing purpose such as buying more property or shares. The fact that there is a mortgage over it now does not affect the fact that the purpose of the present loan was to buy your own residence; this is for a private purpose.
It would be foolish to incur the costs of transferring the city property to a company name as the company may become liable for capital profits at some future date.
In any event, that would not solve your problem because the company would have no extra income apart from the rents and would merely accrue tax losses.
I have no doubt the bank would release the mortgage over the city property if sufficient funds were deposited with it from the sale to reduce the debt to an acceptable level. Any surplus funds could be used for your renovation project.
If you rent out the country house you can claim all the interest (and other expenses) as a tax deduction and will have to show the rents as taxable income.
Once you start to claim a portion of the house costs as a tax deduction, part of any profit from sale may be liable for capital gains tax. This may be a dangerous course of action for a small amount of tax relief.
The best course of action if you want tax relief is to sell the city property, use the proceeds to pay off the remaining home and then borrow the whole purchase price of a rental home in your husband's name.
However, I believe you are too enamoured with the alleged virtues of negative gearing, which to be effective requires a high taxable income, and that the costs of any of your planned strategies will outweigh the benefits.
QUESTION:
My wife and I are expecting a child. We own our home unit valued at approximately $100,000 plus a block of land on which we hope to build a home for our forthcoming family.
The house would cost about $120,000 to build, and we have about $15,000 in cash. Our query is, would we be better off to sell the home unit to pay for the new house or is it possible to take a loan against the unit to pay for the house?
Would such a loan have any tax advantages and would negative gearing apply in any way (I earn about $50,000 a year)?
- G.S., Sydney.
ANSWER:
Interest is tax deductible only if the purpose of the borrowing was to create income which is taxable. Obviously a loan for building your own home is for a private purpose. If you keep the present house you will be in the unenviable position of losing half of the rental in tax while gaining no compensating tax relief from the mortgage.
The best option is to keep the present house until the new one is completed so you have somewhere convenient to live. Then sell the present house, pay off any loan as quickly as possible, and borrow against the equity in the new house to buy income-producing assets such as property and shares.
© 1992 Sydney Morning Herald