I was wondering if you would be so kind to give me some feedback on my current situation and possible options. I have a property in Perth which until Feb this year was my residence. I own the property outright, but I have used some of the equity to secure an IP. When we left Perth we set up the property fully furnished and equipped and leased for 12 months @ $280/wk. The intention was to keep as an IP.
We have just had an offer accepted on a home to purchase. I had hoped to finance the Perth property to release funds for the new purchase, which will become our residnce. When I looked into finance for the purchase I hit an obstacle. The ATO has informed me that if I take out a loan for the purpose of purchasing a new residence then I will not be able to claim expenses against my taxable income as it is for personal purposes. When what I’m trying to do is free up equity to finance an investment property (former Perth residence). Do you know of any options for me to retain Perth property & be able to finance & claim related exp. Or is it a worst case scenario of having to sell Perth property & use the proceeds to purchase new residence. Then use equity to buy a new investment property. I don’t like the idea of paying the government more s/duty on another purchase[angry2].
On the positive side if I do sell Perth property the proceeds will be tax free[biggrin].Cheers,
DaveHi Dave & welcome to the forum,
Have you considered setting up a split loan on the Perth IP,
One portion of the split will be for investment the other portion of the split would be your deposit and closing costs on a separate loan for the purchase of the new PPR,You could also attach an 100% offset linked to the new PPR loan and place the funds from the investment split into this if required. Cheers.
Regards
Steven
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
A simple solution would be to buy the new property in a company or trust name and then rent it from the company or trust. That way, every cent would be deductible.
Your problem is the perfect example as to why I always recommend using an interest only loan with offset account on your PPOR. Most people will always move PPOR at some point in their life.
Finance should be very easy for your situation should servicing and credit history not be an issue.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksThankks Steven And Mortgage Advisor,
Wow, so there is hope yet to achieve our goal.
Steven, The option of split loan and 100% offset linked to new PPOR loan is something I don’t fully understand. Is the new PPOR loan a portion of the split loan or is it an entirely new loan. Either way does that mean there will be a portion that is for PPOR thus unclaimable.[confused2]Mortgage Advisor, that sounds simple enough! We have signed a contract in own names is it possible to change this prior to settlement to a company or trust? I like your comment about moving PPOR. There is every chance that we will be moving and I don’t want the same problem rearing it’s ugly head every time. How does an interest only loan and offset account on PPOR work. Are there any implications that I need to be aware of?
Cheers for your help, much appreciated.[thumbsup2]
Dave
Aside from the mortgage info the others have suggested…
Work some figures out on paper, and see if costs associated with selling Perth property and purchasing new IP will add up to greater expense than tax benefits.
If you have already signed the contracts and want to change the buyer’s name, you will have to pay stamp duty again. An option would be to ask the vendor if they will allow you to sign a new contract in the new name and just cancel the old one. They should not have a problem with this as they will still get the same result.
An interest only loan with offset account is merely a simple loan with a seperate account attached. The only money you pay into the loan is the interest. All your additional funds from work and rental income go into the offset account. As the balance increases in your offset account, the amount the lender calculates interest on is reduced by the balance in your offset account.
Risks include over-spending or mixing deductible and non-deductible debt. Over-spending is an issue of control and can occur with any loan product where there are excess funds. Mixing deductible and non-deductible debt can be avoiding by taking a split loan (second interest only loan) which is just used for deductible expenses.
The biggest benefits of using offset is reducing your non-deductible debt expense and that when you move PPOR, you just take the cash out of your offset account and the loan amount is still at the maximum limit but now deductible.
Any decent broker can show you exactly how all this works.
For a diagram of how it will look, have a look at:
http://www.mortgagepackaging.com.au/tma/index_files/professional_and_other_loan_packages.htm
By the way, I am not an accountant so please seek advice about what you choose to do especially with the changing name of the property. This has many tax implications (usually more beneficial) which are only worthwhile if the figures stack up as Luci has pointed out.
I hope it all works out for you.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksHi Mortgage Adviser,
If you set up a trust/company structure and only have one property inside the trust, ie your PPOR, would this set bells alarming at the ATO??? Would you need to place more than one property inside the trust so as to be “conducting a business” and not just what the ATO deem to be avoidance of tax?
thanks
Not as far as I know. When property is in a company name or trust name, it is a seperate entity and automatically is considered as conducting business. The ATO cannot tell you how much ‘product’ to buy as a business before it is deductible.
Like I said, I am not an Accountant.
By the way, ‘avoiding’ tax is legal, ‘evading’ tax isn’t.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksThanx Luci and Mortgage Advisor,
Good advice, I certainly am looking closely at the end cost/benefit of all options. I want to make sure I have explored all of my options B4 committting either way.
I will be talking with my solicitor re name on contract and my accountant to evaluate the options that have been suggested. I now understand the concept of split loan and offset account, it sounds good.
I will take some time to get everything on paper and digest it all.
Thanx so much,
Dave
Dave
A trust may work, just aware that with trusts losses cannot be distributed. The ATO has also issued a ruling on renting your own house from a unit trust. They don’t like it. But it can be done.
Another option is to sell your existing house to a trust, or you could buy your partner’s share. Either way funds will have to be borrowed and this will make the loan tax deductible. Stamp duty would be payable though.
Terryw
Discover Home Loans
North Sydney
[email protected]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
That gets a little complicated for what is needed. If the new purchase is set up properly, nothing needs to be done with the existing property. If you borrow against the existing property in the future for investment purposes or to lend the money to the company or trust (I prefer company) to buy the new property, it will automatically be deductible. You pay ‘rent’ to the company, the company pays ‘loan repayments’ to you and you then pay the lender for the money borrowed on your existing home. It can all be automated via direct debits and is very simple. Save on stamp duty!
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksOriginally posted by dj71:Steven, The option of split loan and 100% offset linked to new PPOR loan is something I don’t fully understand. Is the new PPOR loan a portion of the split loan or is it an entirely new loan. Either way does that mean there will be a portion that is for PPOR thus unclaimable.[confused2]
Dave
Hi Dave,
The new PPR loan would be a separate loan @ 80% LVR secured by the new purchase, the remaining 20% and purchase costs stamp duty etc will come from the non deductible split that is secured against the Perth IP,You could then access the maximum equity on the Perth IP via the investment split and park this in the offset linked to the new PPR loan, this would reduce your non deductible debt for the period the funds remain in the offset account.
Interest only repayments on the PPR loan will preserve the initial debt if you decide to convert it to an IP at a later stage, Cheers.Regards
Steven
Mortgage BrokerMobile Mortgage Market
Ph: 0402 483 216
[email protected]
http://www.mobilemortgagemarket.com.auPLEASE note comments made should not be taken as specific taxation, financial, legal or investment advice.
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