I have a question. Is it possible to use the equity in an IP to pay off your own mortgage? Are you able to redraw a set amount and put it into your own account? Do you need to get the bank to revalue the IP?
Or is there another way?
Any thoughts would be appreciated.I think it would depend how you have set up the mortgage on the IP. If it was set up as a line of credit and you have paid some off then there is no problem redrawing to the original LOC. If you want to remortgage then the interest on the new additional amount would not be tax deductable.
Phil
Thanks for the reply.
We are building an IP due for completion next year, and once finalised we would get the property revalued /remortgaged and hoping that with capital growth we will have some equity. We are not planning to pay anything off it as it will be an I/O loan. But we thought that after 12 to 14 months with some capital growth we might come out ahead, and use this equity to pay off our own PPOR.Sure you could use the equity to pay off your home loan, but the interest would not be deductible – leaving you in the same situation.
Terryw
Discover Home Loans
Parramatta
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I would recommend that you speak to your accountant prior to doing that because it may not be of any benefit to you because the funds you draw back may not be tax deductible unless you put in some funds of your own into the investment property in the first place. If that was the case all you may end up doing is creating a taxation nightmare for him at tax time.
However, if you put some of your own funds into the IP and want to draw them back to pay off your home loan then you could have the property re-valued on completion then put in an application to increase your loan amount and take some of the equity out for your own home loan.
Hope this makes sense.
Anita Marshall
Advanced Finance Solutions
http://www.advancedfinance.com.au
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Or is there another way?Hiya whatson,
There’s always another way……
Let’s say both you and your wife own the IP as joint tenants.
Why not sell the wife’s half share in the IP to someone you are close to – say yourself.
You take out a big mortgage on the IP (load it up to the hilt), pay stamp duty on the half share transaction and then the wife takes the proceeds she just got from selling her half to you and pays out some or all of the PPoR mortgage with it.
Need to do your calcs of course, but the saving in NTDD over the years usually swamps the stamp duty and other costs payable when “reshuffling”.
Worked for us.
**** Not advice…..just my usual dribble and ramblings.
Here are my thoughts – however its best to check your own solution with a good accountant/lawyer that specialises in Property…
– The things about tax deductability for IP is on my undestanding is that you can only claim the deduction on the mortgage interest costs on the mortgage before it is first rented. So if the property is worth $250K you really want a mortgage at $250K even if you can afford some equity. Put the equity in you PPOR so that the mortage there is less (as its not tax deductable). I think this is why LOC mortgages are good as they allow you to move funds around.
If you remortgage once it is an IP say for an additional 40K then if these are used for improvements then this is tax deductable – if you used the cash for a new car or to pay down your PPOR loan then this amount is not tax deductable.
I would suggest that you get a valuation once you have finished the property and before you have made it available for Let. Then structure your loans so that you IP has the maximum possible mortgage and your PPOR has the lowest amount – try and add some flexibility so that you can move things around if you need to.
Now I’m also thinking there are other ways to do things using Trusts (Hybrid Trusts) but you would need to get specialist advice on that.
hope that helps
phil
I have heard a few people increase their mortgage before moving out, and then claim the whole interest portion as a deduction, and use the funds to pay down the new home loan. Technically they have not increased the mortgage for non investment purposes after the property was an investment, so they feel safe in claiming all of the interest. Don’t think the ATO would see it this way, but the chances of an audit are slim.
Terryw
Discover Home Loans
Parramatta
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Just send me a blank email, with “subscribe†in subject line.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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