I am looking at purchasing a PPOR for myself and wife. (Currently renting) We will have 2 separate loans, one in each of our names. My plan is to convert one of our loans to an IP loan by putting our savings on the loan and then withdrawing the funds to use as a deposit to buy an IP. From what I’ve read this would then make the loan tax deductible (as the loan is for an IP) However if I was to then sell the IP(in a year or so) is the loan still tax deductible?
The test for deductibility of interest is what are the funds used for. If you have a $150,000 loan, put $30,000 into it, then redraw that $30,000 for your IP deposit, only the interest on the $30,000 is deductible (or 20% of the interest).
After you sell, I believe there would be no interest deduction, as there is no asset, or income, to deduct the interest against.
For a definitive answer, go see your local accountant, who will be able to go through all the scenarios with you.
Thanks for that Dan.
I thought that it might of been the case that you need something for it to be tax deductible against, but just wanted to put it out there to see if anyone else had come across the same situation.
Hi Dan
If you took out a loan and invested, then you are meant to repay that loan (from a tax POV) when that investment is sold. So you couldn't keep claiming the interest – an exception is if there was shortfall – eg. if the property was sold at a loss.
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
Thanks Terry
After giving it some more thought I think I’ll use the offset account on the PPOR to deposit the extra funds after the sale of the IP to reduce the interest on the PPOR. This will then allow me to use those funds to borrow again for next IP.
Hi Dan
That may not be the ideal option either.
Imagine if you put the money into the offset, you would be saving interest on your home loan – which is good. But then you take the money out of your offset to buy an investment property. The interest on the home loan would go up – but you cannot claim this on your tax.
A better way may be to park the money in the offset until it is needed and then deposit it into the home loan and reborrow it.
Ideally you should have a separate split on the home loan for this portion. Otherwise if will be less effective in the future when you want to repay down more of the home loan portion while leaving the investment portion as is.
Also consider borrowing all expenses for your investment – such as rates, insurance.
Seek good advice on borrowing to pay the interest on the investment too.
If you do this you may be able to free up heaps of money to pay down the remaining home loan portion much quicker.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
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