Maximising borrowing potential
Question from Michael updated on 23rd December 2019:
I currently own my house which I have renovated over the previous six years. The new market value has come back at $305,000 with me owing only $148,000. I want to keep this property as a rental as it has been appraised at $400 per week.
However, I need the maximum amount of equity out of it to purchase my next property with my partner. She has a $30,000 deposit in cash. I also have a company for my engineering contracting work. Am I best to transfer the current house into the company or how should I structure this for the best deposit on the next property?
Our expert Matthew Gilligan responded:
There are several different, but related, issues at play here.
The focus of your query is on maximising your borrowing potential. Your ability to borrow is the function of two things, being the value of assets you have to offer lenders as security, and the income that you have to service the borrowing that you wish to undertake. Needless to say, asset values and income will not alter dependent on the ownership structure you employ for your existing home.
This brings us to the second issue, which is ensuring you have a structure in place that is as tax efficient as possible. It is probable that the best move for you to make in terms of the existing home is to sell it into a company.
However, you should not sell it into your existing engineering company. We do not believe in mixing ownership of investment property with business activities. We avoid this in order to minimise risk. Instead a new company should be established specifically for rental properties, and that company can acquire this property from you. Selling the property into such a company will allow you to structure your bank borrowing, both existing and new, effectively for tax purposes.
That said, there are tax implications on moving property that you need to be aware of. If this property has been occupied as your home for at least a six-year period, you should be safe in selling this into a company without having adverse tax consequences arise for you as a seller (but should check nonetheless). However, you will need to bear in mind the fact that the company will then be subject to a five-year bright-line period on the property from the point of acquisition.
You should also seek advice on the appropriate ownership structure of the new property. Although you have not said so, I presume that this is going to be a new home. Typically, we would like to see a home owned in trust to get asset protection. While on the face of it you have a fairly straightforward set of circumstances, if we look under the hood there are a number of different things going on here.
The best move for you would be to engage a skilled mortgage broker to help ensure you are maximising your ability to borrow, and a skilled accountant to ensure that you get the appropriate structure in place both in terms of ownership of your properties and making sure that your bank loans are documented effectively for accounting and tax purposes.Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.