Hello there,
Wondering if you could advise me on mortgage/tax legalities.
I currently have a property in Perth bought for $715k.
I took out a $300k IO Westpac Rocket Repayment loan with $125k savings in an offset acct and the rest paid in cash.
Over the last 5 years I have had to use money from that offset account and draw down on my mortgage amount.
Currently my loan is $450k.
I have been transferred to Brisbane on a project where housing is paid for by the company temporarily but I’m looking to make the move permanent and buy a new PPOR and turn my house in Perth to an IP.
Westpac have told me that I can draw down the maximum amount on my Perth house, their last valuation was 730k in 2010 so they might give me say 250k more (450 +250 = 700k). I can then use this 250k as a deposit on a new PPOR in Brisbane.
Regarding the quote “You establish an exact loan balance as at the time the property becomes income producing. This then becomes the full amount of the investment loan. The original loan amount, current as at the time you purchased the property, is not relevant.“
My question is, can I claim tax deduction on full amount of Perth Investment property (i.e. 700k mortgage = circa $4000 interest). Or can I only claim the current interest on 450k mortgage = circa $2500 interest. Or worse still the original mortgage amount when I bought the house = 300k / $1700 interest.
Many thanks in advance for your comments and please let me know if my explanation is unclear.
Hi Luke
Welcome aboard.
To determine whether a loan is tax deductible we need to apply the purpose test.
What is the purpose of the loan? If the increased borrowings are going towards your new PPOR, it won't be deductible.
However, the current debt against your property should be once it turns into an IP (providing all the redrawing of cash you mentioned was done via your offset account).
You need to make sure this is all set up correctly for you. I have no doubt that your Westpac banker will cross up both properties and make a mess of your loan structure.
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]
Thanks Jamie – A real shame that I can't maximize the loan using equity on Perth property in order to finance the 2nd Property in Brisbane based on the purpose test you mentioned. If this is not possible it makes more financial sense to sell in Perth than rent out due to positive gearing. Definitely no grey area here? When I read the quote about "loan balance as at the time the property becomes income producing" I thought it may be possible.
Rgds,
Luke
Hi Luke
Other options to explore include spousal transfer (is possible) or sell the property to another entity like a trust. I'm not sure of what's involved in WA when it comes to either of these – but no doubt there will be costs, it's just a matter of weighing up whether it's worth it or not.
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]
The 150k was personal non-investment spending. The Interest on 300k loan is circa 20,000/yr even with council rates/water management fees etc included I would still be positively geared based on a rental income of $750/week (90% occupancy). I suppose the main justification I could have for holding on to the property would be if I thought I would make a capital gain longterm? Difficult to be able to analyse all the pros and cons. Cheers guys.
Hi Luke
No hate to say you will only be able to claim interest on the original $300,000.
Off the top of my head and without checking the WA OSR website I am unsure as to Stamp Duty that would be payable on a transfer of the property to a Unit Trust for market value but it may be worth weighing up the cost with the benefit that would be received by being able to claim a deduction on the additional $400K borrowing (Plus Stamp duty).
Course you need to look at your current marginal tax rate as there will be an increased benefit the higher Tax bracket you enter.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
lukeclayton wrote:Regarding the quote “You establish an exact loan balance as at the time the property becomes income producing. This then becomes the full amount of the investment loan. The original loan amount, current as at the time you purchased the property, is not relevant.“ .
Where did you get this quote from?
It is grossly incorrect!!
You can only deduct the interest on the amount of the loan associated with the money borrowed to purchase that loan.
On the face of it the $300,000 loan may be the portion relating to the original loan associated with the purchase. But you mention using redraw, so if your loan balance ever dropped below this amount then it would be more complex depending on how you conducted the loan. At the very most it would be the minimum loan amount that the loan achieved. But it could be even less if you were putting money into and pull out of the loan again.
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
Luke, just adding to Jamie's comments, you mentioned an initial loan of $300K, and now it is $450K. What was the extra $150K used for? Investments purposes, personal?
Investment would allow the balance to become deductible, personal not.
Cheers
Tom
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