All Topics / Finance / Turning our PPOR in to a IP…?

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  • Profile photo of zara777zara777
    Member
    @zara777
    Join Date: 2010
    Post Count: 6

    Hi there, I am new to this forum and not at all money savvy. We are buying a new home and have been discussing whether to sell our current PPOR or rent it out. It's leaning towards renting but have been told we will not be able to claim the interest repayments as a deduction….this is our situation:

    We currently live in a flat which we purchased in my husbands name in Dec06 for $400K, with a mortgage of 320K, We have paid this off due to selling my IP in Oct last year, but not closed the mortgage- left a couple of hundred in the account. According to the lender we can redraw $293K.

    If we were to rent this property out we could get 450 minus deductions per week in rent. Or to sell we would get 550-630K.
    We have just purchased a property for 860K. We have paid a deposit of 43K. We also have 250K to put straight on this as a gift from our parents. We also have 70K saved to cover stamp duty fees etc.

    The bank has no problem in lending us up to 580K, obviously we wouldn’t want such a high mortgage though.

    My husband earns $78K a year, and I am currently on Maternity leave so my income this year is 20K, from feb next year I go back to work parttime so will earn 31k a year.


    What do we do?

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Yes, by paying out the loan in full you will not be able to claim any interest on that property. Not even if you withdraw the money from the account because deductibility is determined by the use of the money.

    The problem you have is the flat is in your husband's name and he is on a high income. So the rent (less deductions) will be added to his income and he will pay a high rate of tax. In addition you will have a high mortgage on the new property which you cannot claim the interest on.

    It may work out better to sell the unit and then put the proceeds into the new house and then reborrow to buy another property later on.

    Work out the cost of doing this v the cost of holding it and see how the figures compare.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi zara

    Firstly welcome to the forum and i hope you enjoy your time with us.

    What you need to bear in mind is that the interest on funds redraw from your current lender will not be Tax deductible so redrawing the current loan is probably not that wise. 

    As it stands the rent  will be added to your Gross income and there will be no Interest Deductions.

    To compensate this you certainly could look at selling the property into a Unit Trust structure however this would trigger stamp duty and possible CGT depending on the current value. Given the new loan amount this could still be a viable option.

    Remember it is not a matter of just borrowing $580K.

    Personally i would look at an interest only loan with 100% offset and look at borrowing the full purchase price & stamp duty costs(subject to serviceability). The gift together with the deposit could sit in the offset account in case you decide to move out in the future and want to rent this property out.

    You current lender will probably have no idea on how to structure a sale to a Unit Trust and should be advising you on Tax matters anyway. A good investment orientated mortgage broker should be able to crunch the numbers for you.

    Richard Taylor | Australia's leading private lender

    Profile photo of zara777zara777
    Member
    @zara777
    Join Date: 2010
    Post Count: 6

    Thanks for the advice…it all is very confusing!!

    If we changed the name of the to be IP in to my name would that work? I have been told we would not have to pay stamp duty as you can do this between spouses. But then that would mean refinancing the loan in to my name?

    Can anyone reccommend a good tax accountant in Melbourne that would be able to help?

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    You mean, if you purchased the house off your husband? Yes that would work. Because you could borrow to buy it and the interest would be deductible – but with little negative gearing benefits if you are on low incomes. Also probably have to pay stamp duty depending on which state the property is in (not in Vic possibly). solicitor and loan costs too.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
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    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Terry's point about very little negative gearing benefit is the reason i suggested a UT structure with your husband holding the Units.

    Richard Taylor | Australia's leading private lender

    Profile photo of zara777zara777
    Member
    @zara777
    Join Date: 2010
    Post Count: 6

    Thanks so much for the advice.

    Your right Terry- because i am on such a low income atm due to maternity leave it wouldn't be worth doing this.

    And i have no idea about Unit Trusts…sounds too complicated for me.

    But back to my original querie of whether or not we can claim the interest as deductions or not: The loan we currently have has an inbuild offset account (MyRate Advantage Loan). I transferred about 200K in to the account last year. If my husband were to transfer this back to me, and then i put this amount on the new home later, would we then be able to claim the interest as deductions?

    Profile photo of TerrywTerryw
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    @terryw
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    Post Count: 16,213

    I suspect that so-called offset account is just a redraw facility. Is there a separate account for the offset, ie a separate loan number? If not then it would not be an offset.

    If it is not an offset, then unfortunately you have paid down the loan and taking the money out would be new borrowings and therefore the interest would only be deductible if the money was used for investment purposes.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of zara777zara777
    Member
    @zara777
    Join Date: 2010
    Post Count: 6

    in the loan product info sheet this is what it says:

    Offset Yes (100% offset facility built into loan account)

    http://www.myrate.com.au/Media/pdf/MyRate_Advantage_Rate_Loan.pdf

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Doesn't sound like an offset to me. Sounds like a redraw.
    You had better check with them whether it has a separate account number to the loan. If it doesn't then be careful because you could get into a tax mess if you were to treat it as an offset.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    It is a redraw not an offset account.

    Had a lot of clients come a cropper with the same product.

    They went there because the bottom line interest rate looked attractive and didnt read the fine print.

    Richard Taylor | Australia's leading private lender

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    That would come close to false and misleading advertising..

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of TerrywTerryw
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    @terryw
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    This is why it is a good idea to use a broker. A small mistake can cost thousands.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of zara777zara777
    Member
    @zara777
    Join Date: 2010
    Post Count: 6

    Well i guess we didnt even think about turning the property in to an IP when we bought it. So even if we had seen a lender then we would have still possibly been in this same situation.

    Definately false advertising :(

Viewing 14 posts - 1 through 14 (of 14 total)

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