Hi All,
I'm planning to buy a property and live in it for 1 year to get the FHBG and after 1 year I intend to rent it out.
My questions are:
1. When buying first home is it possible to declare it as a IP as soon as it's rented out on tax form?
2. As soon as the property is rented out can I claim on:
a) Interest paid (regardless whether it'd be a PI loan or I only loan)? if yes, what proportion of interest paid is generally claimed back?
b) building depreciation allowance (assuming it was constructed at 1987)?3. Also would it be advisable for me (first home buyer) to take out a interest only loan for my particular plan? I believe that you pay more interest this way and that you have to pay lum sum of the property value at the end of the term? i.e. if I take a loan of 200K for 10 years term, I'll have to pay 200K at the end of 10 years?
I aplologise if this has been answered
CHeers,
KenYou don't declare anything when you start. Just start declaring the income and claiming the expenses in the tax return that covers the year it is rented out.
You claim all your interest regardless of the type of loan. You cannot claim the Principal amount on a P&I loan.
You will get a depreciation schedule done and that will give you a figure that you can start claiming on.
You will pay the same interest with a IO and P&I loan. The difference is that as your principal decreases at the P&I loan then your interest bill will get lower.
If you intend buying several IPs then go IO on all loans. I recommend this to real investors.
Normal borrowers who reckon one IP is enough usually end up with P&I.
With IO you never have to pay out the whole loan at the end. It usually reverts back to P&I. If you want you can reapply for a new 5 or 10 year IO period.
Hope this helps mate
It is highly recommended, as Simon said, to pay Interest Only, rather than P&I on your loan. Then setup an offset account which is linked to your loan – once you put extra savings and monies here, then you will immediately reduce the interest you pay on the loan. The advantage is that, when you wish to purchase an investment property in a few years, you can actually take that money out of your offset account and use it towards purchasing your new property – under a P&I arrangement you can't do that as easily since the principal that is paid off can't be used as redraw, which is where the offset account comes into its own. This is useful from a tax point of view, at least in Australia.
philos3rd wrote:It is highly recommended, as Simon said, to pay Interest Only, rather than P&I on your loan. Then setup an offset account which is linked to your loan – once you put extra savings and monies here, then you will immediately reduce the interest you pay on the loan. The advantage is that, when you wish to purchase an investment property in a few years, you can actually take that money out of your offset account and use it towards purchasing your new property – under a P&I arrangement you can't do that as easily since the principal that is paid off can't be used as redraw, which is where the offset account comes into its own. This is useful from a tax point of view, at least in Australia.
Nahh not that way mate
Use the offset account for personal use only. Ideally save it for a deposit on a PPOR one day.
If you buy an income producing asset then use borrowed money only. ie Top up the existing mortgage to fund a deposit then borrow 80% against the new IP.
This makes best sense taxwise and is explained in more detail elsewhere.
This is such a confusing aspect of investing that I am dedicating a whole chapter to it in my book.
Cheers,
You can claim interest on the portion of the loan that is in relation to the income producing property.
So if you borrow $500,000 spend $450,000 on the IP and $50,000 on a new boat for example claim the interest on the $500,000 . I think not.
You would want to consider if you look good in stripes or not. You know prison stripes black and white.
Hope this really helps mate.
please excuse my ignorance but I am new and just starting out, I'm as green as a cucumber but what is PPOR
PPOR is principle place of residence (your house)
Good Luck
Thanks Guys
Opportunity…- I think you're right about only being able to claim back interest that you paid only if the proprty is rented out (income producing). Either way I'm leaning towards a PI loan so that I'll own a property outright in a shorter period and once I have that I'll use the equity and IO loan for purchase of a IP. How does that sound?
Also in reagrds to Offset account, is it true that the mortgage interest is only reduced by the interest earned in the offset account and not the total balance?
For example if I had (assuming monthly repayments):
Offset Balance: $30,000
Interest earned: $70 for a particular monthMortgage Loan: $200,000
Interest Rate: 10% p.a.Loan Interest Payable = ($199930 * .01)/12
Can anyone confirm? I've read another post in this forum which states otherwise, i.e. ($170,000 * .01)/12
Ken
kenzel wrote:Thanks GuysOpportunity…- I think you're right about only being able to claim back interest that you paid only if the proprty is rented out (income producing). Either way I'm leaning towards a PI loan so that I'll own a property outright in a shorter period and once I have that I'll use the equity and IO loan for purchase of a IP. How does that sound?
Ken
Sounds like an ill-conceived and naive plan to me.
Lets say it takes you 10 years hard saving to pay off your PPOR.
Had you bought two more IPs in that time you could make more money and have not saved so hard to do so.
Would you rather buy IPs at today's prices or 2017 prices?
With a mortgage the interest you owe is calculated daily and added monthly. Each day you have funds in your offset account means less interest is added. eg. Your loan is $200K. This is the amount that you pay interest on.
Your granddad lends you $50K for 6 months. Each day that is in your offset account you are only being charged interest on $150K. But you are making the set repayment that was calculated on a $200K loan (assuming a P&I loan). So you are actually getting ahead on your principal. When you repay him your interest bill goes up again. But your weekly repayment never changes. Unless you go IO then each month you just pay interest.
One of my properties has a $260K loan IO – I have parked $260K in an offset account and make no monthly repayments whilst it is in there.
Hope this helps.
Sounds to me like you have a plan as to buying IPs. You need a plan to achieve your financial goals – IPs are just part of the executin of the plan – not a goal in themselves. Work out your actual goals and then what you need to get there and stuff will fall into place.
Cheers,
Good advice Simon. Well I have no financial goal at the moment as such but rather a goal to own my first property and not a mortgage. I do agree about buying a house sooner rather than later though because they tend to appreciate that's why I plan to rent my PPOR out after living in it for 1 year (FHOG) and use that income as well as the additional tax return to pay it off quicker and get closer to owning the property and then go after my official IP. I could of course use the rent to save up a deposit for an IP or even 2 by taking out an IO loan and let the renters pay the interest repayments however wouldn't this mean the principal will never be paid off?
"One of my properties has a $260K loan IO – I have parked $260K in an offset account and make no monthly repayments whilst it is in there." – In this case why wouldn't you by the property outright instead of taking out the loan?
I think I'm getting a head spin from all this – think I'll lay off posting again for a couple of weeks to do more research
Thanks for all your info guys, much appreciated
Kenkenzel wrote:"One of my properties has a $260K loan IO – I have parked $260K in an offset account and make no monthly repayments whilst it is in there." – In this case why wouldn't you by the property outright instead of taking out the loan?I think I'm getting a head spin from all this – think I'll lay off posting again for a couple of weeks to do more research
Thanks for all your info guys, much appreciated
KenI could pay it off. But I have no fear of debt. I have plans for that money to build a home later this year. If I pay it into the loan I will need to reborrow it and then it wont be deductible.
By keeping it in my offset I can use it and preserve the tax deductibility.
Keep posting – you learn more by being actively involved than by just visiting. You learn even more by doing – so go and get yourself in debt. When you realise the sun keeps coming up you will wont to do it again and again.
Next boom, what would you rather have paid off?? I fully owned home or 5 properties all 20% paid off???
Cheers,
Hi Simon,
A wealth of knowledge as usual. Having the 260K in the offset account to negate paying anything is good.
How would you solve this little problem? PPOR has 260K morgtage. Inherit property worth 450K but no debt.. Would you sell the 450K property and pay off the PPOR and then buy another investment property using the capital left over from the sale? Is it possible to borrow against the Inherited property and use that money to pay off the PPOR. I read somewhere a few months back of a way to possibly do this but can't find the thread.
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