I have this scenario in my head which a friend of mine says is against ATO rules:
Let’s say you buy your first home for $200,000. 3 years later you have finished paying it off and you are ready to buy something bigger and keep the existing one as an investment property. Your old home is now worth $300,000, so you refinance it back up to 80% and take the $240,000 and plough it into your new $500,000 home. You now have your home and an investment property and you are claiming interest on the $240,000 against your investment property income.
If the above situation is not legit, how do you get around it?
Thanks
AdamThe ATO will say the purpose of your additional borrowing is to buy your new home not to create income.
Alternatives:
1.Sell your first home to your family trust which borrows to purchase.
2. Sell your first home. Put all the proceeds to your new home. Get a line of credit on the new home to use as deposits on your new IPsYes you can do it, but can’t claim the interest if the money was redrawn to pay for your new home.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
Click below to email meTerryw | 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 Adam,
What you propose is not ILLEGAL (as Terry said) however as CRJ correctly points out the interest you then pay is not deductible because you don’t meet the ‘purpose test’.
Selling the property to your Trust will trigger Stamp Duty but provided it was your PPOR then it will not trigger CGT.
The trust however would have as its Cost Base the purchase price that it paid you for the property (which needs to be its true market value or you’ll have Stamp Duty issues to explain).
When the trust disposes of the property in the future then there will be a CGT position to consider and to cope with.
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