First home-owner hope

A recent Housing Industry Association survey showed that a record 50 per cent of Generation Y Australian’s (people born between 1975 and 1990) are living at home with their parents. The figure for Queensland is slightly lower, at 44 per cent and from this week, it might just get a little bit better.

Three reasons:

1. From today, the Queensland state government has abolished stamp duty on homes with a purchase price up to $500,000. First-home buyers will be exempt from stamp and mortgage duty on homes up to $500,000, a saving of around $10,000. Prior to today, the purchase price threshold for exemption from these taxes was $350,000.
2. Tomorrow, a mortgage will cost just that little bit less with the Reserve Bank (RBA) widely tipped to cut interest rates. A cut tomorrow by at least a quarter of one per cent will be the first easing since December 2001 and will help make life a little easier for potential first home owners. The prospect of banks not passing on the RBA cut to retail customers now seems unlikely with recent announcements by NAB, ANZ and Suncorp. On top of this Wizard Home loans has stolen a march on its much bigger rivals. As of today Wizard, cut its standard variable lending rate by 25 basis points in advance of tomorrow’s RBA announcment.
3. The housing market is stagnant (despite what some real estate agents might optimistically say) and house prices are falling. So although prices are still very high (Australia currently ranks as having some of the least affordable property in the english speaking world), it’s a buyers market.

While home affordability is still very tough, these three developments should put some welcome purchasing power in the hands of the first home buyer (and maybe free up a spare bedroom for some Boomer Generation mum and dads)

keeping your previous home as an investment property

Our customers upgrade and move homes for all sorts of reasons and many of them keep their original home as an investment property. They are generally aware that in most cases, the cost of servicing the existing debt on their old home then becomes deductible for tax purposes. However, many have not considered the capital gains tax implications of this kind of arrangement.

The previous home was their principal place of residence, and if sold, would normally attract no capital gains tax (CGT). Now that the home is being used for investment purposes, any future sale of that property is most likely going to trigger a CGT event and some amount of tax will probably be payable. How this is calculated can be complex but it is important to note that CGT will be calculated on the difference in value of the property from the date it was first used as an investment and the sale price when it is finally disposed.

If you are considering such an arrangement it will be important for you to establish the value of your home at this time. To do this you should have the home properly valued by a quantity surveyor or a registered valuation expert.

As the amount of tax you will pay in the future depends on current and future values, it will be ideal to for your house to be valued at as high a price as the valuer can professionally allow. This will help minimise the difference in the sale price and the current price and therefore help minimise any future capital gains tax.

As always, before you make any decisions regarding investing your money, consult your accountant or financial advisor and get advice best suited to your individual circumstances.

What is negative gearing?

Negative gearing is when you borrow to invest and the income you earn from your investment is less than the interest and other associated costs. This loss is claimable against your other earned income – typically your salary or wages.

How does negative gearing work?

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation exceed the income it produces. In simple terms, your investment must make a loss before you can claim the tax benefit. Negative gearing not works only for property, but also other investments like shares and bonds.

Claimable expenses

Property owners can claim deduction and depreciation against income on the property. There are three main classes of deductions available to investors:

1. Revenue deductions – These include interest on the loan as well as ongoing maintenance and expenses such as agent’s fees, council fees, advertising charges, bank fees, body corporate fees, cleaning expenses, and insurance.
2. Claims for capital items – Large capital items such as a hot water service, white goods, etc are subject to depreciation. This means the owner must claim the cost over a number of years rather than all at once.
3. Claims for building allowances – Owners can also claim depreciation of capital works, specifically for building and landscaping. The current rate is 2.5% over 40 years. Commissioning a depreciation schedule from a qualified quantity surveyor is a good way to maximise your depreciation allowances.

Keeping it at arm’s length

In order to claim deductions your dealings with tenants and lenders must be at arm’s length. If you’re renting your property to a family member or a friend at less than the commercial value then you’re not acting at arm’s length, and you cannot claim deductions as you would in a purely commercial arrangement

Keeping records

It’s easier to get your tax right if you’re keeping good records, and this is very true of rental deductions. If you’re keeping good records, it’s much easier to understand which category your expenses fall into, and makes completing your tax return a much simpler task.

Risks associated with gearing.

There is an inherent risk associated with borrowing to fund any investment. While gearing can help you increase your gain on borrowed funds, the losses can be large in adverse circumstances.

As a general rule, only investors with the financial capacity to absorb the effect of potential falls in investment values, as well as an increased cost in interest payments, should consider negative gearing.

You can minimise the risk of gearing by:

1. Choosing your investment property carefully. You need to try and select a property that is likely to increase in value throughout the investment period.
2. Having sufficient income to cover the interest repayments if your tenants are late with their rental payments, or if your property remains vacant for any time. You also need to be able to fund ongoing repairs and maintenance.
3. Taking out Mortgage Protection Insurance with your investment loan

Tax breaks

Tax time is almost here so it makes sense to see what you can do to maximise your return. Consult you tax specialist and look at ideas to make the most of your refund.

1. Pre-pay interest on an investment loan. Paying 12 months interest now means you receive the tax deduction this year
2. Make a super contribution for your spouse. If they earn less than $13,800 and meet other criteria you can boost their super by $3000 and reduce the tax you pay by up to $540
3. Defer income and bonuses until after July 1 if you can. This will push your tax down slightly when the new rates come into effect.
4. Donate to your favourite charity before June 30 and claim the deduction this year.
5. If you've made a profit on the sale of property or shares consider the rest of your investment portfolio. If you've got some dud investments, crytalising the loss now means they'll be claimable against your other profits.

Consult your tax specialist as soon as you can about your tax position and get their recomendation before the financial year closes. If you're self-employed, spend your valuable time maximising your revenue and profit and let the tax experts manage your tax - not vice versa.