We recently moved out of our PPOR and into a new PPOR. We kept our old PPOR and this became an IP and we switched this over to an IO loan. The loan on this was based on what was left on our house which is about half of what it is worth. So we have a bit of equity in this IP and I spoke to the bank about increasing the maximum to access this money and put it onto our current PPOR. Effectively this would mean that we would still pay similar in interest repayments on both properties, however come tax time we would be able to claim more due to the IP having more interest on it. Is my thinking correct?
No. The 'increase' on the rental loan would be used to pay down your PPOR, and would not be deductible.
Interest deductibility is determined by the purpose of the loan. If the money is used to pay down another (non-deductible) loan, then the interest on this portion would not be deductible.
Thanks. I assume the option of increasing the IP loan to pay down the PPOR loan is still the way to go.
As Dan mentioned you can certainly increase the loan (Dont know why you would) but can claim the interest on the increase as a deduction so really no point.
If the property is owned as Joint Tenants you could however look at possibly buying at your spouses share and the interest on such a Transfer would be deductible.
Other costs to be considered but depending on your marginal tax rate may well be worth.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks Dan & Qlds007 I really appreciate your time.
So are you saying not to increase the loan on my IP in order to bring down my loan on my PPOR? Or is it better to sell my IP to help pay off my PPOR and then buy another IP later?
Or just keep going where I'm putting the left over rent money onto my PPOR and will slowly bring the loan down.
Qlds007 wrote:As Dan mentioned you can certainly increase the loan (Dont know why you would) but can claim the interest on the increase as a deduction so really no point.
If the property is owned as Joint Tenants you could however look at possibly buying at your spouses share and the interest on such a Transfer would be deductible.
Other costs to be considered but depending on your marginal tax rate may well be worth.
Its been awhile and I’m still learning this tax game….As an update we still have 2 x IP’s in both my and wife names and our PPOR in both names. I’m interested in somehow increasing the loan on one of our IP through equity and put that onto our PPOR. Our IP is a LOC/IP loan that has $280k of debt while the house is worth approx. $600k.
Qlds007 – How does selling half the IP to me work? And by doing this allow me to claim the full amount of tax on that IP?
pauln wrote:Its been awhile and I’m still learning this tax game….As an update we still have 2 x IP’s in both my and wife names and our PPOR in both names. I’m interested in somehow increasing the loan on one of our IP through equity and put that onto our PPOR. Our IP is a LOC/IP loan that has $280k of debt while the house is worth approx. $600k.
The issue you have is that the purpose of the loan determines deductibility, not the security. If you borrow, say $200k extra against an IP, to paydown your PPOR, the interest on this $200k is not tax deductible. So, overall, you still have the same amount of borrowed money, and the same amount of tax deductible debt. Your position hasn't changed.
One idea is to sell your half of one IP to your wife, or vice versa. You would thne borrow to purchase this half, and this borrowing would be tax deductible. But in this scenario, you would probably have capital gains tax to pay, and maybe stamp duty (depending on which state you are in.)
If you purchased half from your wife, then yes, you would claim he full amount of the tax deductions in your name. This is because you would own 100%, so you would report 100% of the income and expenses.
Sounds like you don't understand the concept of deductiblity of interest. This is determined on what hte borrowed funds are used for. So if you borrow against your old IP (eg LOC) and use this to pay down the new PPOR loan the purpose of the borrowings would be private and therefore the interest could't be deducted.
If A and B jointly own a property and A buys B's share the interest on a loan for this partial purchase would be deductible, generally, if that property is an investment.
This may entail stamp duty and CGT though. So you have to run the figures and see if the tax savings make it worth paying the stamp duty and CGT.
If your properties are in VIC it could be possible to do with only nominal stamp duty.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Thanks all.
We actually lived in the IP first. So does this mean that I won't pay CGT? The other option is to sell this outright before the 6 years is up.
Yes we will have to pay stamp duty about $26k and then legals about $2000.It could be CGT free if that is the case – but then the new one would be subject to CGT.
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
I can see myself in a similar situation, but with time on my hand. I have not bought my new PPOR yet.
I have heard that i can re-finance my current PPOR loan now to a higher LVR and then when it becomes an IP the larger interest amount will be claimable. Is this correct?Cheers
Nathanmi65ni wrote:I can see myself in a similar situation, but with time on my hand. I have not bought my new PPOR yet.
I have heard that i can re-finance my current PPOR loan now to a higher LVR and then when it becomes an IP the larger interest amount will be claimable. Is this correct?Cheers
NathanHi Nathan
No – it doesn’t work like that.
Deductibility is determined by purpose. If you increase your loan now, what will those funds be used for?
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
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"To have some spare cash"
Which would essentially go to a deposit for a new house. So now good then. Thats a bummer.
Exactly, if that new house is a PPOR than that portion of the loan won’t be deductible. If the next house is an IP then it will be.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
I guess the other thing I could do would be to use the equity in my IP and use it for another IP eventually.
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