hello everyone. thanks for your time reading this.
We have a house in perth where we have approx 250k in equity. we owe 150k on it. We used this equity to help purchase an investment property in a close suburb for 340k, (360k borrowed, plus another 50 borrowed on original property but added back to the mortgage for just-in-case purposes). i hope that makes sense.
Anyway, I am just trying to get my head around how we actually pay off our original home loan from the equity growth in the investment home. Is there at any point where we can channel the equity growth *hopefully) in the IP to our original home? The way i see it, after a year, you take out the equity that year has made and transfer it to original mortgage till the 150k is paid off. Is this possible, or not good for tax purposes? And, my goal is to pay off our family home ASAP and by taking the growth out of the IP and whacking it on the home loan. I am currently thinking my husband has taken to speaking Dutch about this topic, especially double dutch, so i am looking for clarity. If anyone can help i would be much appreciative. Thankyou
Tracey
The ATO looks at the purpose of each loan you take out when determining whether you can claim the interest.
So if you raised the loan on your IP and sent the money into your PPOR the ATO will see this as a new loan and the purpose is for your PPOR – so not deductible and you have also made it more complex for no reason.
The only way to legally release the equity is to sell the IP, pay CGT, pay a real estate agent and put the remainder into your PPOR loan. If you stil lwant an IP then you have to buy a new one with a 105% loan and pay stamp duty over again. Hardly worth it in most cases.
You can “sell” your share to your spouse and put your “profit” into your home loan. In some states he may not even have to pay stamp duty on the transaction. He can then borrow all the cash to pay your share resulting in a higher IP loan and a lower PPOR loan.
Both of you can even “sell” into a family trust of some type. The trust will borrow 105% and the profit goes into your home loan. The Trust will need to be created for around $2000 and administered every year and it will also pay stamp duty.
So as you can see there is no easy way around this problem that we all face when we wish to use our IP equity to reduce our PPOR loan.
I hope I have explained it clearly but remember my advice is no substitue for an accountants professional opinion of your situation. I have just provided some food for thought.
Cheers,
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
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0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Well described Simon. That’s pretty much it in a nutshell.
Hi Simon,
Thankyou for your reply. We have a couple further questions.
We both have a joint mortgage on our original home and share the equity. The investment property is in my husband’s name only for tax purposes. When you suggest to “sell” my part to my spouse, are you meaning on our original home loan, or the investment property loan when we hopefully make some equity. I think you are meaning the Investment loan. But if its already in entirely his name, for the negative gearing aspect, then i have no share yes?
Thankyou for your help.
Tracey
If you sell, you can increase the loan and claim the interest. The released funds then can be used to pay down the home loan, and you can still claim the interest – as the purpose of the loan was to buy an investment. May not work in all cases.
Anotehr option is to sell to your trust.
Another way to channel equity into your home loan is to borrow all expenses from a LOC and put the money you would have used into your home loan.
Still a further way woudl be to borrow some money from the LOC to pay the interest on the home loan. Some accountants are not happy with this, so please check first.
Terryw
Discover Home Loans
Parramatta
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Thanks very much Terry, your reply is much appreciated.
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