All Topics / Finance / Using equity from an IP for the purchase of a private property

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  • Profile photo of athomsonathomson
    Participant
    @athomson
    Join Date: 2009
    Post Count: 2
    September 10, 2009 - 5:25 am

    Scenario:

    Own a property in NSW worth 375K. My wife and I lived there for 4 years before moving to Melbourne. We have been living in Melbourne for just under a year and we currently rent. At the moment we are actively looking to purchase another home to live in thus making our property in NSW an IP.
    We owe 219K on the property in NSW and we are in the process of renovating the block which will cost us 35K. We are looking to refinance our loan in NSW to release equity for the renovation.

    Question:

    Can we borrow 80% of the value of the property and use the equity to conduct the following:
    i) Renovate the block (35K)

    ii) Use the remaining equity to put into a deposit + stamp duty + fees on our next home?

    Putting numbers to the scenario: Value 375K x 80%= 300k

    Debt: 219k

    Equity: 300k-219k- 81k

    i) Renovation 35k still leaves 46k

    ii) Use the 46K to assist with the deposit and fees on another home leaving us in the following position:
    IP debt= 300K
    New property purchased at 700K
    Debt on new private property= 560K using cash (140k) plus equity (46k) to cover stamp+ fees etc from property in NSW

    Also, will the interest on our new debt on our property in NSW be tax deductable?
    Help on this topic will be greatly appreciated

    Profile photo of FinSpecFinSpec
    Member
    @finspec
    Join Date: 2009
    Post Count: 137
    September 10, 2009 - 7:29 am

    I'm not sure how much you can borrow, but I'm sure with the right numbers some of the other guys here can help.  However from a tax point of view, it's easiest to think of more general terms and define yourself a rule of what is and what is not deductible.  I usually use "What did I do with the money?" rule – being, if you used the money to buy something that generates income (investments, business etc) then the interest on that money is deductible – if you used it for yourself (car, home, home rennovation, holiday etc) then you can't claim a deduction.

    So, if you move out of this place and turn it into a rental, any money that was borrowe for that property (the rental, not the new place) will be deductible, including the rennovation funds – however any money that was borrowed to fund the new place (the $46k you're going to use as part of the deposit) will not be.

    Hope that helps a little!

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