Transcription
Hello everyone. Welcome to our session today. Um, the topic will be how to buy a property with zero cash and maximize interest deductions. Okay, let's simply look.
So, before we go to the main content of the session, a quick declaration. The information provided is for general guidance only. We recommend consulting an experienced tax advisor or planner before making any decisions. Also, we're not licensed financial planners and can't provide financial product advice. If you need any financial advice, please find a financial planner to help you.
All right. So, basically, I prepared two simple case studies to illustrate the possible strategies. Okay. So, the first, um, case study, um, okay, let's say Steve, uh, plans to purchase an investment property for 1 million. To finance this, he secured a loan of 800k. Okay. Additionally, Steve refinanced an existing property that had appreciated in value, basically accumulated equity, okay, creating a split loan of 300K. And then he used the split loan to cover the down payment, stamp duty, legal fees, repair, maintenance cost for this new rental property, and the total cost combined together is 300K. Okay. As a result, Steve did not have to use any personal cash for the purchase or related expenses. Additionally, he can claim an interest deduction on a combined loan balance of 1.1 million. Okay. So, basically, by leveraging the bank's funds, um, he can enhance his investment potential. Okay. So, let's say, for example, if the bank's interest rate is 6% and his investment return is 8%, he effectively earned a net return of 2% after covering the bank's interest. Okay. Of course, we, um, also at the same time, is maximizing deductions. Okay. So, instead of the normal, uh, uh, 800k loan, yeah, what he can achieve at the beginning, now he can claim interest reduction on a loan balance of 1.1 million.
All right. Let's have a look at the second case study. That's actually related to, uh, internal transfer between family members. So, you can potentially also utilize this strategy to transfer to, uh, different tax entity within the family group, such as a family trust. Okay. So, let's have a look at the case study. Five years ago, Steve purchased an investment property for 1 million. Okay. His current loan balance stands at 800k at the moment, and he can claim interest reduction on this amount, of course. Okay. Today, the property's market value has appreciated to 1.5 million. To optimize their financial position, Steve's wife, Mary, purchased the property with a new bank loan of 1.2 million. Okay. The reason why it's 1.2 million, just let you know, is basically 80% of the house price, the market value of the, of the property. That's a general, um, percentage the bank will, uh, loan, normally a general, uh, scenario. Okay. So, this strategy increased the family's, uh, interest deductible loan by 400k because initially Steve's loan balance is 800k, and then now, after the wife purchased the property, the new bank loan will be 1.2 million.
All right. Then, basically, um, they increased the interest, uh, deduction, um, or interest deductible loan balance by 400k. All right. And then, additionally, they generated 400k in cash flow, which can be used for private purposes. Okay. For example, they can use it to repay part of their existing residential mortgage for their main residence, okay, or, uh, to buy another investment, okay, that could yield a higher return than the bank's interest rate. So, that's also possible.
All right. And then, of course, some people might ask a question, what's the difference between a refinance? So, because through a refinance, you can also get, because when the property increases on value, the bank will be willing to give you more money out, okay, out of a refinance. A key difference between a refinance strategy and this strategy is, is the interest deduction will still be based on the original loan balance if the money you get out is for private purpose. So, that's a key reason why normally a mortgage refinance will not help you to achieve, um, the purpose of maximizing your interest deduction on the loan balance. Okay.
All right. So, that's the main difference. And then, uh, of course, the examples look simple, yeah, but in reality, you do have to consider multiple other factors. Okay. So, key factors to consider include borrowing capacity. Of course, the family member who's purchasing the property needs to have that borrowing capacity to be able to have that level of loan. Uh, family pledge loans, potentially you can consider this as well if, in case, parents want to buy, uh, a new property, okay, for their children and then act as a guarantor, if their children, um, doesn't have or don't have other income. And then, of course, you can potentially consider first home buyer schemes. That's going to be a bonus add-on to the whole strategy if, in case, one family member didn't have, didn't purchase any, uh, first home before in Australia. Okay. You also need to consider capital gains tax when the family member selling the property. Okay. How much family, uh, capital gains tax that family member will need to pay. That's going to be, um, acting as a part of your initial cost. Okay. And then, of course, marginal tax rates. Different family members might have different marginal tax rates. Okay. To, um, so you need to consider the new ownership split. Okay. If you want to transfer a property or portion of a property between family members. Stamp duty, that's the initial cost you need to consider as well. But luckily, in the, in the strategy we mentioned, some stamp duty can actually be combined ways, uh, part of the loan balance, the new loan balance that you can claim an interest deduction, and then, of course, um, it can also, uh, be included as a, um, deduction when you are calculating future capital gain tax, all right, on this, uh, uh, stamp duty cost. Asset protection, succession planning is planning that also needs to be included in your considerations, um, when you want to maximize future family wealth and reduce, uh, risk, yeah, when you want to pass down assets between different generations, okay, within family groups. Okay. Tax compliance is also important as well. Make sure that, um, uh, when you are setting up the strategy, you're not actually triggering any tax avoidance issues, okay, from ATO. And then also, of course, cost-benefit analysis. Normally, uh, before you even start implementing the strategies, you've got to do a cost-benefit analysis. So, initially, the cost can include capital gains tax, okay, it can include, um, potentially some stamp duty, and then, um, you know, other costs, legal costs on the transfer. And then, um, the benefit could be future tax saving, could be protecting your risk, okay, for the, um, family assets, okay, maximizing, maximizing future wealth, okay. So, that, that could be the future benefit. Okay. Then you need to put the two things together to see whether it's going to be providing you much more benefit than cost, then you want to proceed to, um, implement all the strategies.
All right. So, because of that, it's actually very complicated. The examples look simple, yeah, we simplified the examples to make it easier for you to understand, but underlying the strategies, um, underlying all the procedures, there are many, many other factors you have to consider. So, that's the reason why we strongly recommend you consulting with us or an experienced tax planner who actually specializes in property taxes, like us.
All right. That's everything I wanted to cover in today's session. Thank you for joining us, and I'll talk to you in our next session. Oh, actually, before that, I almost forgot. Okay. Here is our contact details and a brief introduction about myself. So, if you have any questions on tax law, on, um, property, or anything, um, here are my contact details. Uh, give us a call, send us an email, yeah, by all means, anytime. Okay. Ask us any, um, tax planning questions, okay, and see how much value we can help you to save. All right. That's everything for today's session. We'll see you next time. Thank you.