Moving to a new PPOR

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Jacqui Middleton
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@jacm
Join Date: 2009
Post Count: 2,539
February 2, 2011 - 10:48 pm
Let's say you've got an unencumbered PPOR, but fancy relocating to a different suburb, let's say into another property worth about double your current PPOR. What strategy would you use, and why?
Would you:
– Sell up your current PPOR and use it as a large deposit on the new PPOR?
– Buy the new property as an IP, let tenants sit in it for a couple of years, and then sell your PPOR to clear down the debt before moving in yourself?
– Remain in current PPOR and carry on buying IPs, forget about moving?
– Convert current PPOR to IP and forego the loan interest deductability?
– Other?
Jacqui Middleton | Middleton Buyers Advocates
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Dan42
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@dan42
Join Date: 2008
Post Count: 619
February 2, 2011 - 11:06 pm
It really depends on your personal circumstances, and how much you want to move.
I'm assuming you don't have to sell to buy the new PPOR. The question I'd be asking is, could the capital tied up in the current PPOR be better used elsewhere?
If you decide to move, I would probably sell the current PPOR, take my capital gains tax free and put the cash in an offset account attached to the new PPOR. Then it is available to use as a deposit on a new IP when you wanted it.
Terryw
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@terryw
Join Date: 2001
Post Count: 16,213
February 3, 2011 - 11:14 am
I think it would often work out better if you sold. Unless, maybe, you had large sums of cash to use to purchase the new one.
Do some sums and see:
How much tax you will pay on the rent of the old one, and
How much non deductible interest you will pay on the new one.
And then compare this to the sums as if you had sold the old one.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Jacqui Middleton
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@jacm
Join Date: 2009
Post Count: 2,539
February 3, 2011 - 12:40 pm
@dan: yep I could remain in my current residence for another year or two, but keen to move at or before the two year mark.
@terry: indeed. I have done those sums and the sums say sell I hate that. I like the rule of never sell. Such a waste of stamp duty, legals and selling fees! I was kind of hopeful someone would spring up with some innovative way to hang onto the current place and move into the new one, without getting stung on the taxes as you say. I finally understand that I cannot expect to borrow against current PPOR to buy new PPOR and expect to deduct interest on current PPOR even though it would be an IP. Reason being the borrowings would be for a new PPOR which is not an investment item and thus no deductibility. What I still do not understand is: let's pretend my current PPOR had been interest only from day one, and therefore the full principal amount were still owing (albeit with a huge pile of cash in the offset). If I then withdraw that offset money to use for the new PPOR, would the debt on what is the current PPOR (converted to IP) be deductible? It is a debt…. the original purpose of the loan I took out was for PPOR purposes…. but by declaring I now want that house to be an IP would that debt's mortgage interest suddenly be deductible??? Seems weird…
Jacqui Middleton | Middleton Buyers Advocates
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Terryw
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@terryw
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February 3, 2011 - 12:53 pm
JacM wrote:
@dan: yep I could remain in my current residence for another year or two, but keen to move at or before the two year mark.
@terry: indeed. I have done those sums and the sums say sell I hate that. I like the rule of never sell. Such a waste of stamp duty, legals and selling fees! I was kind of hopeful someone would spring up with some innovative way to hang onto the current place and move into the new one, without getting stung on the taxes as you say. I finally understand that I cannot expect to borrow against current PPOR to buy new PPOR and expect to deduct interest on current PPOR even though it would be an IP. Reason being the borrowings would be for a new PPOR which is not an investment item and thus no deductibility. What I still do not understand is: let's pretend my current PPOR had been interest only from day one, and therefore the full principal amount were still owing (albeit with a huge pile of cash in the offset). If I then withdraw that offset money to use for the new PPOR, would the debt on what is the current PPOR (converted to IP) be deductible? It is a debt…. the original purpose of the loan I took out was for PPOR purposes…. but by declaring I now want that house to be an IP would that debt's mortgage interest suddenly be deductible??? Seems weird…
Yep. The original loan would be deductible. The purpose of the loan was to buy a property. If the use of the property later changes the loan is still intact and should be claimable if the place becomes an investment.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Jacqui Middleton
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@jacm
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February 3, 2011 - 1:23 pm
Right okay. Damn I wish someone in the know had pulled me aside when I bought the house and said for gods sake luv, interest only with offset. None of this principal and interest business nooooooo.
Thanks Terry.
Jacqui Middleton | Middleton Buyers Advocates
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Richard Taylor
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@qlds007
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February 3, 2011 - 7:08 pm
Terry is of course correct but selling the property to a Unit Trust with you being the Unit holder can sort of obtain the net result.
Deductible interest and Title retained.
Of course this comes at a cost being Stamp Duty and possibly triggering Land Tax.
Nothing in this world is free.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Terryw
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@terryw
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Post Count: 16,213
February 3, 2011 - 10:20 pm
JacM wrote:
Right okay. Damn I wish someone in the know had pulled me aside when I bought the house and said for gods sake luv, interest only with offset. None of this principal and interest business nooooooo.
Thanks Terry.
Don't worry too much Jac, we all make mistakes. I have made plenty.
Just remember to try to learn from the mistakes of others as it can save you the hassle.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Dan42
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@dan42
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Post Count: 619
February 3, 2011 - 10:25 pm
The flip side Jac is that the sale of your current PPOR will be tax free. You can then use the cash from the sale to reduce your non-deductible debt.
The offset account is a beautiful thing, though.
Jacqui Middleton
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@jacm
Join Date: 2009
Post Count: 2,539
February 3, 2011 - 10:51 pm
Yes indeed. I've already told my younger brother all about this – putting surplus funds into an offset account and not onto the mortgage, and convert from P&I loan to IP loan as well if possible and cost-efficient to do so.
Thanks heaps guys! This is incredibly helpful and critical towards my current decision-making process
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
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VIC Buyers' Agents for investors, home buyers & SMSFs.