Noel Whittaker's  Questions & Answers - page 40 29-6-08: Question: I bought a house in 2003 for $196,000. I lived in it for six months and it has been rented out since. I am planning to sell it for about $410,000. How much capital gains tax will I have to pay? Should I hold off selling for a year or so? Answer: You can be absent from your residence for up to six years without losing the CGT exemption, provided you do not claim any other property as your residence during that time. Therefore, there would be no CGT if that is the only property you have. You are getting close to the end of the six-year period, so you may need to return to it for a short while to restart the six-year period if you wish to keep the house for 'a few more years. Question: My wife and I are a fairly young couple with no children. We own our home which has a value of about $350,000. We have used the equity in our home to obtain a line of credit and borrowed $120,000 to invest in the sharemarket, along with $120,000 of our own money. On our combined income of about $140,000 we are able to meet our loan repayments and save fairly easily. We are not sure if the additional money left after expenses each week should be used for further borrowings to acquire more shares or an investment property. Answer: You have done very well to date and you have a great attitude to money. A fundamental principle is that you only borrow if you need to, and you should be aware that pressure on your budget will grow once you have children. You should talk to a financial planner to work out how much you will need at retirement and whether the assets you have now will be sufficient to get you there. If not, you could consider additionalborrowing for investment and I would prefer share-based investments as they are likely to give much better returns long term. Question: I have a $570,000 interest-only bank loan for two investment properties. One property is a good investment; the other, a hotel room bought for $250,000, has been a bad investment after the rental guarantee period expired. It earns $20,000 a year gross rent. However, the hotel management company takes $19,200 a year under a 10-year contract. I then receive a net rent return of $800. There's little chance of my challenging this contract or of selling the property, due to the negligible net rent and the management contract. Paying the bank loan interest is draining my finances, and I want to plan for my retirement, build up my super and later move closer to the city. I am 49 years old, earn $85,800 gross a year, and have $40,000 super, $110,000 of collectables, no other debt and I own my home worth $540,000. What should I do? Answer: You are confirming what I've said many times - hotel rooms are one of the worst investments of all. It's particularly bad in your case because it appears you have little chance of selling it. It may be worth considering dropping the price to far less than you paid for it just to get out of it and at the same time, but not before, sell the investment property. You could then offset the losses on the hotel room against the profits on the rental property. Another option might be to sell your collectables, but in my experience they don't realise as much as you hope they will. --------------------------------------------------------------------------------------------------------------------------------------------------------- 14-7-08: Question: I have just received an inheritance of $10,000. We have two children and I run a business and work part time. My husband works full time and will finish an apprenticeship this year, which means an increase in income. What would be the best option to invest our money in for about 12 months? We don't expect to add any other savings to the amount but are relying on interest to add to our house deposit as we are eligible for the first home owners grant. Do you recommend shares or term deposits? Answer: If you will need the money in 12 months you cannot afford entry or exit fees or the chance of your money falling in value because the market has had a crash. Therefore, I suggest you use an online account offered by institutions such as BankWest or ING. Question: My partner and I bought our first home in July 2007 - receiving the first home owners grant. If we were to rent out the house, is the interest on the mortgage repayments tax deductible? If we sold within or after our first 12 months of owning, are we liable for CGT? Answer: All the outgoings, including interest, are tax deductible when the house is rented out and the rents will be assessable. Capital gains tax may not be an issue if you rent yourselves because you can be absent from your residence for up to six years without losing the CGT exemption, provided you do not claim another property as your residence in that period. Question: I seem to recall you stating that repayments of $8/1000 mortgage per month is a good formula for paying mortgages off, say in 10 years. Given that current interest rates might reach 9.6 per cent sooner rather than later, should that formula be changed in the current environment as the above rule would only repay interest? What would be a good formula for a 10 per cent per annum interest-rate mortgage and a 10-year term? Answer: Repayments of $8 a thousand a month will pay off a loan in 30 years at 9 per cent. If you can increase them to $9 a thousand it will reduce the term to just under 20 years and save you a large amount of interest. Also making larger payments than are required gives you a safety buffer if rates rise or you get into financial strife. Question: I have two properties I want to sell worth about $900,000. I plan to invest the money in a term deposit and live off the interest. Is this too good to be true or are there risks? Answer: You will need to take into account the cost of selling as well as capital gains tax as these two items could take a hefty chunk of your capital. The problem with having all your money in interest-bearing accounts is that there is no capital growth and no tax concessions on the interest. If you are eligible to contribute to super and lack of access is not a problem for you, I suggest you take advice about progressively moving money into superannuation as this should create huge tax savings for you. --------------------------------------------------------------------------------------------------------------------------------------------------------- 18-7-08: Question: My wife and I have a combined income of $200,000. We live in a $400,000 apartment with a $270,000 mortgage. We also have an investment property worth $240,000, still owing $210,000. We would like to buy a house, which will probably cost $600,000; however, we are trying to avoid spending more than 30 per cent of our income on a mortgage. We could not make up our minds on whether we should put in extra repayments to pay off our apartment in 10 years' time or go ahead with the purchase of a $600,000 house? Answer: You will need to do a budget to satisfy yourself if you can afford the repayments on any property you decide to buy, but you should also consider whether you are getting too many assets in the residential property basket. An option may be to sell the apartment if it can be done free of capital gains tax, and minimise the amount you need to borrow for the new home. You could then borrow back for investment and the interest on this new loan would be tax deductible. Question: I bought my own home a few years ago valued at $260,000 and have reduced the loan to $1800000 through extra repayments. I intend to upgrade to a bigger home in a few years and rent out my current home. I have about $2500 a month left over after paying my P&I mortgage, which I have been using to make extra repayments. If I continue to put these extra repayments onto my mortgage (and pay off say another $50,000) and then redraw them (back to the maximum loan amount) to use as a deposit on my new home, will I be able to claim the interest on the total value of the loan or just on the minimum value I have paid off to? I have received conflicting advice. Answer: If you keep your existing property and rent it out, your interest deductions will be limited to the debt at the time it was available for rent. A much better option is to keep your spare money in an offset account, or if your bank does not provide one, in a separate savings account. This will maximise the debt on the existing property when you rent it out. Question: I bought a property five years ago. I refinanced just over a year ago for the amount owing on the loan so I could turn it into a rental property and have had a tenant for the full 12 months. I would like to sell but I have no idea what taxes I would have to pay. The house was valued at $130,000 when I refinanced, I borrowed $100,000 in the interest only loan and the house now has a resale value of between $120,000 and $125,000.I have no idea if it is worth selling or how much I will pay in taxes. Answer: Your accountant will be able to do the calculations for you, but you should appreciate that the borrowings have nothing to do with the amount of CGT you will pay. If you lived in the property for the first four years, you will be liable only for CGT on any increase in value from the date you moved out. The good news is that there may be no CGT to pay if the original property was your home and you did not claim any other property as your residence since you vacated. Question: I am thinking about buying an investment property with a good friend of mine. Our combined income is considered low, $80,000, but we expect pay rises in the future. We were looking at buying for $350,000. What would be the easiest way to get started? We are thinking about getting an interest only loan but are a bit worried that we might have to come up with 20 per cent deposit? Would it better to get another type of investment? Answer: Be very wary about buying properties with family or friends because far too often the situation becomes difficult when one of the parties has a change in their situation such as a transfer, a job loss or marriage. When this happens the property may have to be placed on the market and unnecessary capital gains tax and transaction costs paid. I prefer borrowing for shares because they are far more flexible and you can borrow to a level that suits your circumstances. --------------------------------------------------------------------------------------------------------------------------------------------------------- Back to: HOME       Back to: Finance        Back to: Whittaker (39)      Forward to: Whittaker (41)