Future Plans for our Home
So I was having a chat with Kathy regarding our home and one of the topics that we covered was what we planned to do with our home if we decided to relocate out of AU when Brandon’s in College.
Currently our home is Joint. Since the house is our main residence, it’s not considered an investment property, so there are no deductions. However, since we’re not paying rent which would be considered to be an expense, we’ll be classifying our home as equity. As we’re paying down our mortgage, we’re increasing our equity annually. It’s a forced savings and increases our savings rate. The house is our asset (property value), mortgage is our liability (home loan), so the home would be equity (assets less liabilities). If we decide to move out one day, then we’ll rent out the property and treat it as an investment property. Until then, we’ll treat it as equity.
IF we decide to move our home into the Family Trust one day, one of the issues would be when we decide to treat our home as an investment property. Interest can be deducted, so moving the home to the Family Trust would be collecting rental income within the Trust, but the mortgage would still be under our Joint names, so technically the interest can’t be deducted as it’s tied to our names, and not to the Trust. If we can somehow make the Trust be liable to pay interest on our mortgage, where the Trust makes interest payments to our Joint names, then the interest should be able to be deducted. However, how would we then treat the interest we received as income? That’s taxable then. Quite complicated so it seems, so we might not take this route. There’s also negative gearing to factor in since the Trust doesn’t treat negative gearing.
IF we decide to keep the home under Joint as is, then we technically wouldn’t be able to transfer the home to Brandon tax free. Under the family discretionary trust we wouldn’t need to deal with the paperwork or tax complications (unless it’s estate tax), but we wouldn’t be able to deduct the interest either.
IF we decide to keep the home under Joint as as, and treat the home as an investment property after we move out AND decide NOT to transfer to Brandon, but instead we may consider selling the home in the future, that would be considered taxable on capital gains since the home is no longer considered to be our main residence. Capital gains is tax free for main residence only, and not for investment properties.
If we decide to keep the home under Joint as is, and treat the home as an investment property after we move out AND decide NOT to transfer to Brandon, AND consider NOT selling the home in the future, there wouldn’t be much tax implications. We can deduct the interest payments against the rental income even if we decide not to do negative gearing. However, how about 10+ years later if the interest payments become much lower and we start paying more into principal, then that would mean rental income would be much higher than the interest payments, so that would be considered taxable. I believe the term is positive gearing. Positive gearing occurs when you receive more in rental income from your tenants than what you pay on the likes of loan repayments, interest, property maintenance, management fees, rates etc. This is common when rents are high due to strong demand for rental property and interest rates are low. With the current market conditions where the interest rate is around 6%, we wouldn’t have this issue within the first 5-to-10 years anyway due to negative gearing.
Would we consider using our Home Equity to fund more investment properties or our investments one day? Possibly, but there would be many factors to consider. For instance, home equity requires Kathy to continue to remain salaried. Not sure if the mortgage lender would allow for us to take out a HELOC within the Trust as it may complicate things, but definitely a drawback to consider.
Is there a difference between Family Discretionary Trust and a Living Trust? Yes, but may need to discuss with a lawyer and an accountant if we decide to pursue this path.
Our goal is to retire when Brandon’s in College. However, this only assumes that Kathy decides to retire into something as opposed to do nothing at all cause that would be boring. I would still continue to invest and continue to build our wealth. Hopefully the snowball effect would be working for us by the time we reach FI. We plan to have a minimum of 3-4 properties, one for our home<->investment, 1-2 for equity, and one for Brandon so that he wouldn’t get priced out of the market. It’s hard to say with the current market conditions since the interest rate is at 6% to-date, but we’ll keep our options opened and look for potential opportunities as they arise.
