Kevin and Irene are both corporate executives earning a family income of $640,000 per annum. They were in the process of purchasing a new main residence in the lower north shore for $2.1M. They intended to rent it out for 5 years and remain in their existing home.
They wanted advice on the most tax effective way to structure their loans and were unsure whether to keep their existing home as an investment or sell it and reduce the debt of their new main residence.
Their existing home was also in the lower north shore and valued at $1.5M, with a $930,000 home loan that they were making principal and interest repayments of $5,750 per month. They also owned an investment property in Sydney’s south valued at $800,000, with a $430,000 home loan that they were making principal and interest repayments of $3,300 per month.
They were advised to increase their existing main residence and investment property loans to raise a $370,000 deposit plus costs for their new main residence, and borrow the remaining amount to complete the purchase. They had a loan pre-approval and were intending to make $10,700 in principal and interest repayments.
That’s when they came to us for guidance.
The problems before we got involved
- If Kevin and Irene followed their broker’s loan structure recommendation, they would have to pay $69,709 in loan mortgage insurance
- Their loan structure recommendation would also create unnecessary tax consequences by mixing tax deductible and non-tax deductible debts
- They were advised to make principal repayments of $83,504 per annum to reduce both tax deductible and non-tax deductible debts at the same time, creating additional unfavourable tax consequences
- By purchasing their new main residence in joint names and renting it out, Kevin and Irene would increase their land tax liabilities as Irene owned the property in Sydney’s south in her name only
- Should Irene take time off to have a child, purchasing their new main residence in joint names would reduce the tax deductibility of their property by 50%
How Tax Effective helped Kevin and Irene
- We advised Kevin and Irene to increase their existing home and investment loans to an 80% loan to value ratio, reducing the loan to value ratio of their new main residence from 88% to 82%
- We recommended that the increases be established as separate loans to separate current and future tax deductible debts to provide greater tax benefits
- We recommended that they redirect the $83,504 principal repayments into an offset facility attached to their existing home loan
- We advised that they purchase their new property as tenants in common, with a majority of the ownership going to Kevin to enable them to maintain maximum tax benefits should Irene temporarily leave work to have a child and to reduce land tax implications
- We recommended that they use the accumulated funds in the offset facility to pay off a significant amount of debt on their new home loan and to increase their investment deductions on their old main residence
- We also recommended that they keep their self-funding investment property in Sydney’s south. This property can be sold in the future and the proceeds used to pay off all their debts
- We found a major bank that would exempt Kevin and Irene from paying loan mortgage insurance on an 82% loan to value ratio
As a result of our recommendations, Kevin and Irene will achieve the following
- By increasing their loans to an 80% loan to value ratio, Kevin and Irene were able to save $69,709 in loan mortgage insurance
- By restructuring their loans, they should have in excess of $326,387 that can be used to repay their non-tax deductible debts when they move into their new property. This strategy will also provide a $22,848 tax saving each year
- David and Irene will save approximately $9,500 in land tax per annum
- By holding onto both of their existing properties, they have a $2.3M self-funding property investment portfolio enjoying compound growth. They can be used as security to build additional wealth, be used to eliminate their all their debts in the future or a combination of the two
Post becoming clients
We’ll be meeting with Kevin and Irene in July to prepare and lodge their income tax returns and use this as an opportunity to revisit their cash flow, strategy and keep an eye open for potential tax planning and investment opportunities present themselves.
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