Hi Everyone, sorry for the mini essay below to state my scenario.
I have a scenario which I believe could be quite common. I thought it was logical but have been told initially by my bank manager that it MAY not be ok and my tax accountant today says it's NOT ok. Here goes with made up figures:
1) Currently live in a principle residence valuated at $400,000 with $150,000 still owing, therefore have $250,000 in equity. $300 per week rental potential.
2) I want to upsize to a bigger house which costs $800,000. Instead of selling my existing $400,000 house, I want to convert it to an investment property.
3) This would then mean I have $950,000 total in loans. I will be taking out new loans to finance both homes via two separate loans.
4) I thought that I could formulate my loans using my $250,000 equity in my exisiting house. Have my existing house loan created at $400,000 for investment purposes and $550,000 loan for the new principle residence. I was hoping to do this to maximise negative gearing.
5) But I have been told this is not ok due to the intent of the usage for the $250,000 equity for non-investment purposes and cannot be claimed for negative gearing purposes. This is going to kill me a little if all I can claim is the existing $150,000 loan as it will be massively postively geared.
6) An argument is, what is the difference if I sold my existing house with $250,000 cash difference, bought my $800,000 with a $550,000 loan and then purchased a house for investment purposes for $400,000?
7) Does it make a difference if I'm creating new loans for each property?
Bank manager willing to change loans to what I want.9) Could I get a second opinion from a different specialist? Financial adviser?
Many thanks in advance for any advice!
Your accountant is correct.
Intent doens't really matter in this case. It is what the borrowed funds are used for that counts.
If you increase your existing loan you are actually borrowing again. Taking money out of a loan account = borrowing.
So if you borrow $250,000 extra the ATO will look at what this $250,000 is used for. If you use it for the new house then the interest won't be deductible.
You arguement at 6 doesn't apply because you are not selling and buying an investment property again. You are dealing with an existing property with a $150,000 loan.
You could sell and achieve this – in fact you should look at the figures involved as it may work out better. Sell to a family member, maybe.
What you need to do is to look at ways to borrow money for the existing house in addition to what you have. When you rent it out the interest on these funds should be deductible. Just increasing the loan is not enough.
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
OMG A Bank manager told you it could be ok.
Heard it all now.
Another reason not to listen to your Bank but to your Accountant instead.
Next thing they will be trying to convince us the world is flat.
Richard Taylor | Australia's leading private lender
Thanks for the suggestions that allows me to further explore.
Missed out on auction over the weekend so will continue looking.
Not sure if it's the right time to find a place at the moment with prices close to record highs in Melbourne.
noisuf – i am in a similar position, with a IP (ex-PPOR within 6 year CG rule) which thanks to crazy perth property boom now has around $200k equity in it. Its an awesome apartment, with great positive cashflow and all in all a terrific IP. I will be looking at purchasing PPOR in say 2 years time, after purchasing hopefuly IP 2 and IP 3.
My accountant said the best thing for me to do, when I'm ready for purchasing PPOR, is to sell my terrific little IP, put the CG (which shoudl be CGT free due to 6 yr rule, no other PPoR nominated) into my new PPoR, get the LVR down on that and then borrow against equity there to purchase another IP.
At first I was shocked with his advice and couldn't dream of selling, but now that I understand so much more about loans, finance, what is tax-deductible interest and what isn't, it all makes good sense. His advice was always put every spare cent you have in your PPoR loan, and keep IP loans as high as possible. that strategy is obviously going to lead to more negative or neutrally geared IPs initially, but as rental returns raise and CG grows, its still a great position to be in.
wisepearl wrote:noisuf – i am in a similar position, with a IP (ex-PPOR within 6 year CG rule) which thanks to crazy perth property boom now has around $200k equity in it. Its an awesome apartment, with great positive cashflow and all in all a terrific IP. I will be looking at purchasing PPOR in say 2 years time, after purchasing hopefuly IP 2 and IP 3.My accountant said the best thing for me to do, when I'm ready for purchasing PPOR, is to sell my terrific little IP, put the CG (which shoudl be CGT free due to 6 yr rule, no other PPoR nominated) into my new PPoR, get the LVR down on that and then borrow against equity there to purchase another IP.
At first I was shocked with his advice and couldn't dream of selling, but now that I understand so much more about loans, finance, what is tax-deductible interest and what isn't, it all makes good sense. His advice was always put every spare cent you have in your PPoR loan, and keep IP loans as high as possible. that strategy is obviously going to lead to more negative or neutrally geared IPs initially, but as rental returns raise and CG grows, its still a great position to be in.
Sounds good.
You will incur stamp duty when you buy again and some small costs, but the tax deductions saved should make up for it – but work it all out yourself before hand.
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
Bank manager willing to change loans to what I want.
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