Hi everyone,
We are thinking about buying a bigger home and invest the current one. We have made a lot of extra payments in our current home loan and we are thinking about taking them out to put as deposit of our new home. And when we start investing the old home we will claim the interest from the new balance of the old home loan as tax deduction.
However we heard that ATO will check the history of our home loan and will take the redraw as private use and we cannot claim interest on the new balance of the home loan. Is that true? I don’t think it’s fair if it’s true because when we redraw our old home would still be our own home and wouldn’t be an investment property yet.
Any info will be appreciated.
Row
That sounds correct. The ATO will check what the funds are used for.
You see, if you put money into a loan, you are paying it off. When you take the money out again you are actually reborrowing money – a new loan.
If you had an interest only loan and placed all extra funds in a 100% offset account, then you would have saved the same interest, but would have had access of all the tax benefits which you are now going to miss out on.
BTW, the ATO will only need to see statements if you are audited.
Terryw
Discover Home Loans
Parramatta
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Terry is right.
I always counsel my clients to structure the loan as Terry describes if they think that they may be moving onto a better place and renting out the first one.
It may feel unfair to you but it is the law.
There are ways around it – none cheap. Typcially they involve “selling” the house to a spouse or trust and that new buyer borrowing 100+%. These funds are then used to buy the new property.
It leaves you with a deductible loan and all your equity in the new property. But it generally triggers stamp duty and trust fees if you choose that path.
Some people opt to sell the property and buy a renter but this just adds in agents fees as well as the stamp duty.
All the best
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Thanks Terry and Simon for your replies. What do you mean by ‘restructuring the loan’? Is it like refinancing? Can we refinance the home and get a new loan so there’s no redraw in the new loan?
Otherwise do you think it’s an option that my husband sell the home to me (as both the property and the home loan are under his name)? Our home is worth less than $400,000 which I understand will not trigger any stamp duty (I heard that now buying properties under $500,000 will not need to pay stamp duty). So the only cost will be bank fees when I apply for a home loan, and legal fees. Then we can invest under my name.
Row, refinancing will not help, as the original purpose will be the same – taking money out for the new house.
Selling the house (from husband to you) may be an option, but will be costly. Firstly stamp duty will apply and will be a lot. So you have to weigh up the savings in tax against the cost of this. Plus legal fees, loan exit fees, loan application fees, govt charges etc.
Terryw
Discover Home Loans
Parramatta
[email protected]
Sign up to my mailing list.
Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry for your reply. Seems that our only option to upgrade is to sell our home….
Hi, Guys
After reading the opinions, I just wanted to clarify on redrawing extra repayments and taxation.
The redrawn extra repayments will not be treated by tax deductible, due to the fact that those extra repayment is considered your own private money (Your own earnings).
So, when Row moves out and declares her old home as an invetment property, ATO will then view the interest generated from the remainder of the loan in her old home as tax deductible?
Regards
Daniel Lee [specs]Originally posted by daniellee:Hi, Guys
After reading the opinions, I just wanted to clarify on redrawing extra repayments and taxation.
The redrawn extra repayments will not be treated by tax deductible, due to the fact that those extra repayment is considered your own private money (Your own earnings).
So, when Row moves out and declares her old home as an invetment property, ATO will then view the interest generated from the remainder of the loan in her old home as tax deductible?
Regards
Daniel Lee [specs]When the current home becomes a rental property the loan will be for the purpose of buying that property and be deductible because that property generates income.
Money paid into that loan at any time is seen as a repayment.
Money drawn from that loan is seen as a new loan and the purpose it is used for determines deductibility.
If used to pay rates, insurance, repairs etc on that original property it will also be deductible.
If it is used to buy a new home, car, boat, plasma telly etc it is deemed as personal use and not deductible.
This means a loan with a X% that is always nondeductible. You cannot pay this back faster either. It must be paid down in equal propertion to the rest of that loan – so until the loan is 100% paid out it will always have X% nondeductible.
You can see what a mess this can create.
An offset account is my vehicle of choice as the money saved never contaminates the actual loan and stays in a seperate account always.
It is neither fair nor unfair. It is the law and we must work within that framework. Not worth fighting it, just plan properly.
Hope this helps make the situation clearer.
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Originally posted by row:Thanks Terry for your reply. Seems that our only option to upgrade is to sell our home….
Or just keep it, and change the loan to IO, and just wear the extra payments on the new loan for the PPOR. This may end up cheaper than selling the old one.
Terryw
Discover Home Loans
Parramatta
[email protected]
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry, is IO Interest Only? What is PPOR? Thanks.
Originally posted by row:Terry, is IO Interest Only? What is PPOR? Thanks.
PPOR = principal place lace of residence = home
IO = Interest Only
Simon Macks
Residential and Commercial Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
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