Thanks for a great site full of helpful advice.
We currently own one property as our PPOR. We estimate the value to be $600k and we currently owe $286k (split loan with each of us owing half). We are $12k ahead in repayments.
We are looking to buy a 2nd property to become our PPOR and keep the 1st property to rent out.
We will likely go to a different lender for a loan for the 2nd property. We have a reasonable cash deposit but may need to access some of the equity in our 1st property so as to stay under the 80% LVR for our 2nd property (particularly if we are buying at auction and then will have to see what the bank says about its valuation).
My questions:
1. are there any restrictions/traps for us accessing cash from the equity of the 1st property to help finance purchase of the 2nd property?
2. am I correct from reading other posts that we will be able to claim tax deductions on the interest on the $286k once we start renting it out, but not on any equity accessed to finance the PPOR purchase.
Hi Squirrel
Firstly welcome to the forum and I hope you enjoy your time with us.
There are a few questions raised so let us begin and knocking them off one at a time.
When you say "WE" own our PPOR I will assume you mean you and your partner / spouse etc.
On this basis there are a couple of considerations depending on where the property is located:
1) Switch the existing loan to interest only. Yes you will only be able to claim a tax deduction on the current loan balance as it is now being $286K.
2) Look to take out a separate loan against the current PPOR (future IP) being either a Line of credit or equity interest only loan. The interest on this loan will not be deductible so you might want to structure it differently.
3) Using a separate lender secure a loan of 80% of the new purchase price using the balance of loan 2) above and your own cash savings to cover the acqusition price and associated costs.
An alternative structure would be to look at purchasing your partners share in the current property, paying any stamp duty and then borrowing the full amount and claiming a Tax deduction in your name on the entire interest.
You then use the funds raised as deposit on the new property (Future PPOR) converting non deductible debt to deductible debt.
Obviously without the relevant numbers it is difficult to fully assess the situation however certainly worth thinking about.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks Richard
Yes "We" is my husband and I.
In relation to the alternative option you have put forward, as we live in Victoria, having looked at another post just now, am I right in understanding that I wouldn't have to pay stamp duty if I were to purchase my husband's share?
Also, would we need to get a valuation on the current PPOR (future IP) in order to determine the share that I would be purchasing?In Victoria a spouse can probably purchase the other spouses share of a property without paying stamp duty. Borrowing to buy this share should result in the interest on this borrowing to be deductible if the property is then rented out. So you will be freeing up cash which will result in a lower loan on the new PPOR and result in lower non deductible interest. = Greater deductions.
You shouldnt really need a valuation if you just base it on the bank's own valuation. You will need to redo the loans as the ownership is changing and will need to do the conveyancing as well. But it will probably be worth it. It could save you up to $8k to $10k approx per year in interest and the effect will accumulate.
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
Hi Squirrel
You would need to get a valuation on your PPOR, as I believe you are looking to extract equity to stay under LMI limits.
You should be able to claim the 286K in tax deductions, but consult your accountant asap.
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