A way to ease into your first IP??

[spaceman]

One of the disadvanteges of owning your own property to live in is that it is not tax efficient.

For example
Your PPOR needs painting .... you pay for it with your after-tax dollars ... no deduction.
However if your IP needs painting ..... you pay with your before-tax dollars ..... tax deduction can apply.

There are of course advantages to owning your own PPOR ... peace of mind for one.
I see however some people recomending the sale of your PPOR ... then renting, and using the cash you made for IP's.

How about this as a kind of middle road.

Take two guys ... lets call them S and M (no cracks about whips and rubber please)

S owns his own PPOR and is paying off the mortgage to the bank .... M does like wise, with a house of simliar value.

Both decide that they would like to have a bit of a crack at thi IP thing but are a bit nervous about taking that first step. The biggest hurdle being, will the bank loan us money to by another property?

S comes up with an idea.

S sells his PPOR to M .. but stays living there .... instead of S's money going straight to the bank man it now goes to M in the form of rent who then pay the mortgage.
M now sells his PPOR to S ... but stays living there. .... see where this is going?

What has changed?

S & M both owned a house before .... they still do ... only they don't live in the house they own.

Now as both S & M are landlords the interest on both mortgages is tax deductible ..... wasn't before hand.

The monthly outgoings for both S & M have stayed the same .... and the mortgages are being paid off faster thanks to the allowable tax deductions for a whole host of expenses, that aren't claimable on your PPOR but are quite legitimate on an IP.

Are there any disadvantages ...... not to my mind, but hey it was my idea.

But what if ??...... I hear you say.
The biggest WHAT IF I could imagine is that S & M both decide that they now hate each other and can nolonger work together. 2 options here as I see it.
1 Sell the houses back to each other and go back to the original state of affairs ..... money could be lost here if it only lasted a short time ... lawyers fees etc .... also depreciation to think about
2 Each person moves into the house that they own ... S moves to M's original house and visa versa. ..... this obviously may pose some problems.

Another problem I see arising would be if the properties were of a signifcant difference in value ..... or the original mortgages were of a substantially different amount ( both houses $300k but S owes 100k and M owes $250k)

Who could this be a good idea for. Perhaps a couple of blokes like S & M who have known each other for a long time and are prepared to trust each other. Perhaps it could be a way for a parent to help their kids into a house?

I'm running out of time here ....... bomber command is calling .................but this is how I started

If anybody has any questions or comments feel free to ask.

Cheers
Spaceman

[Julian]

Ummm, well ...no, not really. They both originally owned the houses as PPOR. When they took out their loans to buy the houses (originally) the purpose would have been to purchase a PPOR. Therefore there would be no claimability on loan funds because the purpose of the loan, at the time the loan was taken out, was personal use. The would have to sell the loan to another entity which would borrow money for investing.

Secondly, you are opening up a can of worms in doing what you suggest. I have the feeling it would be more likely to wreck a friendship than foster savings even if it was legit. And I'm sure it would not be seen as legit if done between family members, although between friends it possibly could be.

Why not consider doing what worked for me. I sold my PPOR and put the money into investments. I rented, very cheaply, at a highly desirable location in Auckland. The property where I was renting would have been worth close to $1m, and for my very comfortable furnished flat under the main house I was paying $150pw - and that included power. I was about 150m from the golden sands of one of Auckland City's nicest swimming beaches, and had sea views.

Part of my rent was claimable as I was running my company from home. My investments were working hard for me (and still do). And I was doing nothing contentious with the tax department. I ceased having to work in paid employment, though on occasions I did - mostly to help friends out.

I lived in a great location, paid bugger-all for the privilege, and had my investments returning high yields. And my relationships with friends were harmonious.

Julian.

[drelly]

Um.... I think that you could claim on the interest as you had (on the surface) purchased an entirely different house to rent.

However, the only reason to do this and not just sell, move out and rent somewhere else as Julian suggested, would be a particularly strong attachment to your property. That would mean a legal agreement with the other party to return the property to you at some point, which in turn would give the IRD indisputeable evidence that you were trying to evade tax.... fines... bankruptcy... etc.

It seems like an overly complicated and risky thing to do when you could just sell the house, rent and invest.

[CJ]

Far to complicated. What happens if the house you live in but dont own (but use to) needs $10k worth of mainanence?

Keep thinking. Always good to see suggestions.

[Julian]

As often happens my skim reading let me down (damn useless brain) and I originally read it that they went to live in each other's house, but as you quite rightly pointed out, Dave, this was not the how it was written.

Of course this would mean more conveyanceing charges and the poossibility that the "friend" might not want to part with his new house - and as you say, any side agreement that enforced a condition that the houses were sold back to each other at some later date would be viewed unfavourably by the IRD.

Julian.

[spaceman]

The point about wrecking freindships is a very valid one. I wouldn't suggest that anybody walk into that situation without having a very good think about things first.

But in answer to a couple of points.

Both S & M pay off their PPOR mortgages with the sale of their own homes. They then purchase the IP with a new loan, on which the interest is tax deuctible.

Julian ... sound like you got a nice place at a very low rent ... I'm sure nearly everybody in Auckland would like to be paying $150 per week. I'm guessing to get such a low rent you know the landlord (maybe not). Part of my reason for doing this deal was ...who would you rather be paying money to??
.... the bank? helping them to make money
.... some lanlord you don't know? ...... helping him make money
... a friend? ...... helping him make money while he helps you in return.
It's obvious which one I chose.

As for is it legit?? ..... well if you were charing each other only $1 per month rent ... then the IRD would be after you eventually. But if you are charging markets rents (which we are) then there should be no problem. It would be possible to structure this deal so that the IP's ran at a tax loss forever ..... this WOULD be tax evasion and illegal ... but we haven't done this and the mortgages are being paid off and eventually both homes will be mortgage free and returning a healthy profit on which we'll be paying tax.
There is no intention to pull some kind of shifty deal on the rent here ... so why would it matter who owns the property you are renting be it a mate, a relative or a complete stranger.

Part of our rent is/was also tax deductible as we were both operating a business out of our homes.

Drelly ... your point about a agreement to sell the houses back to each other being looked at by the IRD is also very valid .... BUT one thing I didn't mention was that for both of us, the PPOR's we were living in were our first homes. Not our DREAM homes that we hoped to retire into ... we both still own these homes but don't intend living in them forever... hopefully on to better things will mean such an agreement isn't needed .... both S & M see it this way ....... we would only look at selling back to each other if something unforeseen happens.
In fact M is talking about a bigger place for him and his growing kids ... no worries ..... I'll buy him a new place that he likes and he'll shift in and pay me market rates .... then I will rent out the place he was living in to somebody else ( i could sell it if i wanted to fund the bigger place but have enough cash not to need to)

Simply selling and rent then investing will work ..... but again who would you rather pay rent to ... a complete straneger and help them get ahead or a mate.

CJ .... this is part of the best bit about the deal.
Before if the house needed maitenance ... you paid with your after tax dollars ..... now your landlord pays with his before tax dollars ..... of course this gets back to what Julian said about possibly wrecking a friendship. What happens if your new landlord is an a**hole and doesn't want to do the repair work .... could be a problem and ruin the friendship.
If I was living in my PPOR and decide to paint my house ... i have to pay and get no tax deduction ...... instead I say to M "the house needs painting" ..... it gets painted and M can claim the expense against his taxible income. Of course both parties need to be reasonable here. As an example I have paid for new carpet and lino in my house (where M is living) and M has painted his house ( where I'm living). YES this could be fraught with problems but M and I talked about this before entering into the deal, as well as getting both our wives onside as well. We have known each other since 1988 when we both joined the army together and feel that we know and trust each other enough to make thing work out.
I know that I'm fortunate to have such a close friend and perhaps this is why the deal is working out so well for him and I.


FAR TOO COMPLICATED??? I really disagree here.

I sold me house and invested the money and live in a rented house( as Drelly recomends) it just happens that I didn't need to pack up all my stuff and shift.
I have a great landlord who I can rely on and can count on ( even though he supports the wrong super 12 team). He has a great tenant who he can count on.
Of course he has a complete sh*t of a landlord (me) and I have tenant who is scum of the earth (M) ........ just joking

I know this is thinking a little outside the box. But it is working well for S & M, we are both better off because of it and it has been working for us without problems for the last 5 years. Of course I'm looking at this with rose tinted specs on and one mans meat may be another mans poison.


There is a little more to this story ... regarding the chattels ... but I'll have to finish up later ...... the sweet young MRS S is calling.

Cheers
Spaceman

[Julian]

Sounds like the way you have done things all should be well. Well done and good luck.
Julian.

[Stevegoodey]

Hmmm wow interesting read you have got to love a true original idea when you hear one.

Keep it up.

Steve

[The_Dog]

I've heard it talked about 12 years ago, so it's not a new thing. Great to hear someone actually doing it!!

The Dog

[David-Suzuki]

If it is obvious that owning a property is less tax-effective than renting it, then you have saved a few dollars by setting up such a situation with a friend.

I am sure the learning experience and team-work gained was more important than the tax saved - given that either of you could have rented from the general market at any time.

[spaceman]

Hi All

David-Suzuki

Yes the learing experience was/is important ..... but don't underestimate the importance of saving more than just a few dollars ..... money in my pocket instead of the taxmans feel better than "normal" money

The_Dog

Dam dam dam and double dam. All this time I though I was a super smarty-pants, and you go and tell me you heard about it 12 years ago .... bugger better not try and join Mensa just yet.

The reason for this post was to put the idea out there for somebody else to try or to adapt their own version.
If anybody does good luck and if you have any questions from somebody who is walking the walk. I'm only to happy to provide my advise and opinions. Just as long as you remember that I'm no expert, just a normal bloke and you should always get professional advice when it comes to money and taxes and the cost of getting it wrong can be high

Cheers
Spaceman