Hi all,
I was just after some information as my parents are planning to purchase a new property, here’s the situation.
My parents currently own the house they live in (loan paid off couple years ago) [call this House 1]. They are planning to get finance and purchase a second property [House 2], which they would like to move into as it’s bigger and better then their current house. They then plan to rent out House 1.
Now, my question is, can they remortgage (not sure of term or process) House 1, this money to pay for House 2 and then claim the interest on the remortgaged House 1?
Hopefully this makes some sense?
Any help and advice you could provide will be greatly appreciated.
Thanks,
Nik [exhappy]
Hi Nik,
Unfortunately the process as you have outlined will not provide your parents with deductible interest. The ATO will look at the purpose of the new borrowings (to buy the new home) and this will determine that the refinance money is not deductible.
I assume your parent own the first property as joint tenants and have equal shares in the property. It is possible for the higher income earner to buy out the others share.
The funds realised through this process will be deductible and the funds from the sale can be used towards the new house. Throug this process you will get two ‘half debts’ and not the all and nothing arrangement you were hoping for in your explanation.
Another option may be to sell the first house (it is CGT free) take the agent’s fees hit and stamp duty and buy the new home. Use the funds from the sale of the first property to buy the new home and then leverage off the home into other investments.
As per my first option there are costs involved here (agent’s fees and stamp duty) but the deductibility of the new borrowings will be confirmed.
If your parents are ‘downsizing’ then this option may be valid. If they are upsizing then they need to be wary of not trying to keep up with the neighbours and take on too much non-deductible debt.
Non-deductible debt is the hardest of all to manage and pay off.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958
Skype – derekjones2113Hi Derek,
Thanks for the great information [thumbsupanim]
Nik
Sell the house and then…. by a rental and a
PPOR,,,,
so that you can benefit from setting you financing the right way…..
So many people make the mistake of buying a better house than the original one …. but the funds are for personal use and thus useless to claim on interest of the loan.even seek financial advise and see if you can set up a structure and buy 2 houses and rent out one of the entity and then rent the other one out.
Cheers
Kiwi
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