Hi there, recently me and my partner had purchased a property well run down and needed complete renovations, our initial thoughts where to rent this property out, its a 2 bedroom unit in Chelsea, however we have now decided to make it our prime residence and rent out our first unit that was in seaford. Currently the Seaford property is valued at $275k and we had paid 200k for it, we have worked our buts off for the last 2 years trying to decrease that mortgage on Seaford and currently now owe 110k as well as saving a deposit for our now Chelsea residence. My question is as we are renting Seaford out and only owe 110k roughly being $700 p/m and rent income is $1100p/m we then have to pay that additional $1100 in income tax p/m. Is it worth refinancing the loan as the full amount of 200k to offset the amount of tax/interest we pay on the loan. My family and friends cant help me, and is it advised separetely to see an accountant in regards to paying this income tax on the rental returns.
Hi there
Welcome to the forum.
It's not possible to re-gear a loan in that way.
You'd only be able to claim a deduction on the remaining $110k loan – which should be changed to interest only if it hasn't been already.
If you increased the loan – the increased portion wouldn't be tax deductible unless it was being used for investment purposes (which isn't the case here).
You could look at a spousal transfer but there is likely to be costs involved – it's just a matter of weighing them up against the benefits.
p.s – Don't make the same mistake with the Chelsea property. If you think it may become an IP at some point, then set up the loan as interest only with an offset and place any spare cash you have in the offset rather then paying down the principle.
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]
Hi mjm,
As Jamie said, you can't increase the loan just for the sake of it and expect it to be tax deductible unless the funds were being directly used for investment purposes.
Just to expand on his point about spousal transfer, since you are from Victoria you would be exempt from stamp duty if you went via that route though there might be CGT to pay as it already has transferred into an IP. With this one can buy the outstanding share from the other and borrow the funds thereby increasing the loan amount and making it deductible.
Cheers
Tom
Yup MJM I feel your pain,
I made this same mistake, and now cannot access the collateral in our property. As we are wanting to organize finance quickly for our new home we have cross collateralised (gasp!) our old PPOR now IP to reduce what we need to pay as a deposit for our new PPOR. I know this cross collaterlising is often seen as a dirty word, but our old property is in a good area which will continue to grow (it actually is atm) and we are looking at buying in Brisbane which we hope will grow also. At the end of the day the IP is of little risk and it is giving us better borrowing power without the LMI and I anticipate (bad word in this climate I know) that both properties will have an LVR of 80% or less each in the next 12 months anyway.
Thank you so much Jamie. Yes, i think it was a case of us making the wrong decisions based on not enough communication with people who have been there and a having our financial institution suggest our Investment needs. "CBA". And us both not thinking of tomorrow, " Will it become a IP" I think we are extremely uneducated in the matter of investment strategies as well as misguided by family members and friends saying "Its great just buy any property and pay off as much as you can and one day you will own a house", wow. I want to learn and i want to achieve something i didnt think i could. I have been questioning for months to my partner, it does not add up, Our petty cash is not doing anything but escaping from the Jar. And being caught up in the moment and not having good people like your self or researching before jumping into loans has got me into this predicament. I have since today changed my loan on chelsea to "interest only" and i have made a appointment to now speak with Yellow Brick road. We are now looking at facing reality and staying in seaford renting chelsea and living uncomfortable to be comfortable. Thank you so much for your time and knowledge.
Kind Regards
Michael Mac
Thank you Tom, Back to the bat Cave (seaford) so to speak."Chelsea IP now". Interest only loan. Still paid deposit to eliminate LMI as unknowledgable, Nieve and new to this world. My parents have made mistakes and never tried to better them selfs and i suppose where happy to have a roof over our heads and food. I dont want to be in the same predicament. Thankyou for your advice tom also.
Kind Reagards
MichaelM
You made a mistake because you didn't seek proper advice. Now you are going to make another mistake by seeing the incorrect people 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
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