Hi Experts,
Can some explain me to understand a following scenario?
If I have two investment properties. IP A and IP B. And I am currently renting.
IP A is house with land and total purchased price is 450,000.00.
IP B is an brand new apartment and purchased price is 415,000.00.Both properties are purchased in year 2009.
Lets say, I am targeting IP A to pay off (fully or partially) because I want to move my self in when its installment is reasonably low or may be completely payoff.
To Pay off IP A i am doing Principal + Interest payment on it. And I am paying just Interest on IP B.
After 3 years price of IP B increased to 460,000.00. So I will have some equity on that.
Lets say I will refinance IP B and withdraw equity of around (30,000.00) from IP B and pay off from IP A, do I have to pay any tax on 30,000.00? I know that doing so I am going to increase debt on IP B, but anyway that is going to be my Investment Property for ever. So whatever I will pay for that I am going to get tax benefit on that. And after few years if I will payoff (partially or fully) IP A, I will move in to it.
Is that sounds like a good plan?
Thanks in advance for all readers.
microchip78,
If you call the tax office, they can give you a ruling.But, my guess is – you will not be up for any tax, since are only withdrawing equity, your bank may charge you a fee and may not even allow it since you will have no equity in the house, but that another subject.
Also I can understand your reasons for your thinking and yes it makes sense, but again, if you use the money to simply repay some loan with another then you have not created another assett, thus will not be able to claim a tax deduction as you have no new assett giving you extra income.But, again if you ring the tax man they can give you a ruling…. It would be interesting to find out if you can get away with it legally.
WJ Hooker wrote:your bank may charge you a fee and may not even allow it since you will have no equity in the house, but that another subject.Thanks for your reply WJ Hooker. I appreciate your quick response. But I didn't understand above quoted comment. May be it is a different topic but I would like to understand it as I thought bank should allow me to withdraw an equity from IP B and pay off from IP A.
WJ Hooker wrote:but again, if you use the money to simply repay some loan with another then you have not created another asset, thus will not be able to claim a tax deduction as you have no new assett giving you extra income.I know I am not creating any other asset. But my idea is to pay off the debt of IP A which I am targeting to live in to it.
For example at the start I have debt of 350,000.00 on IP A and 350,000.00 on IP B. I am paying 2500.00 of installments on both.
After 3 years price of IP B increased and it has an equity of 30,000.00 on that. IP A has also increased its price but I don't want to withdraw anything from there because it is the one I want to pay off.
Now I withdraw 30,000.00 from IP B and pay off from IP A. So My new debt will be something like this.
For IP A,
New Debt = 350,000 – 30,000 = 320,000.00
For IP B,
New Debt = 350,000 + 30,000 = 380,000.00
So My total debt will be still same 700,000.00 but my installment on IP A will reduce and Installment on IP B will increased.
In terms of tax benefit I will have same benefit as it was before. But what happen this way, I will transfer all my debt from IP A to IP B as time goes and I will pay off the IP A. Once I will pay off IP A, I will move in to that.
Is that right strategy or m i missing something?
Please help me to understand this.
WJ Hooker wrote:But, again if you ring the tax man they can give you a ruling…. It would be interesting to find out if you can get away with it legally.I will call up my accountant and find out.
Thanks for suggestion.
microchip78
Reply to first part – I do not know all your individual situations obviously, so do not know what bank or banks etc have your loans, but if same bank for both. Then maybe they will charge a valuation fee, a withdraw fee, a fee for breathing ( just a joke). Also you will need to keep some calatoral on house otherwise morgage insurance and all that stuff. Thats what I mean, but maybe you have that worked out.
Part 2. I understand what you are trying to do, it makes sense to do what you say. But as I said I don't like your chances of the ATO allowing it, they will say its a tax minimization attempt, its where the money goes to that determines the tax claim ability. So if you are not creating extra income than its not allowed. Otherwise everyone would do what you are planning eg You will hear the question on this forum all the time " Can I rent my house that I own ( or mostly own ) and buy another house with the money I borrow by using my existing house as calatoral – then claim the interest on the new loan" Which the answer is NO, since the money is not put into a new investment.
Part 3. Don't believe one accontant – get the tax man to make a private ruling if the accountant says its ok.Best of luck.
Hi Microchip,
Your stratergy for the $30K will cause you disadvantage.Reason – Whilst they are both IP's your interest deductions will basically be the same. You're just shifting $30K from one loan to another, one goes up $30K one goes down $30K. Except you are going to pay refinance costs (your disadvantage).
When you move into IP 1 it ceases to be an income producing Asset so the interest on its original loan is non deductible and the interest on the $30K also becomes non deductible.
Dont be confused by the common misunderstanding that borrowing against an investment property means its automatically deductible. It is what the loan goes towards that determines if you can claim or not.
Phil
Phil_Melb wrote:Hi Microchip,
Your stratergy for the $30K will cause you disadvantage.Reason – Whilst they are both IP's your interest deductions will basically be the same. You're just shifting $30K from one loan to another, one goes up $30K one goes down $30K. Except you are going to pay refinance costs (your disadvantage).
When you move into IP 1 it ceases to be an income producing Asset so the interest on its original loan is non deductible and the interest on the $30K also becomes non deductible.
Don't be confused by the common misunderstanding that borrowing against an investment property means its automatically deductible. It is what the loan goes towards that determines if you can claim or not.
Phil
All these are very confusing. Where can we seek help for investment strategy?
Is there any good reference of institution who can be an advisor for an investment?
Thanks and Regards.
You don't pay tax on borrowed money. But what you are saying you will do is really just shifting the loan from property B to A. Tax deductibility depends on the purpose of the borrowing and what the funds are used for. You are borrowing to pay down personal debt. So the extra interest on the increase won't be deductible.
What you could do though is set up a LOC on either property and borrow to pay expenses for property B. This frees up cash to pay off property A. You can even borrow to pay interest on property B. Using this method can save you thousands in tax – but you have to set it up properly and should get a private ruling first.
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
Terryw wrote:You don't pay tax on borrowed money. But what you are saying you will do is really just shifting the loan from property B to A. Tax deductibility depends on the purpose of the borrowing and what the funds are used for. You are borrowing to pay down personal debt.Once you move into IP the purpose changes of the extra loan.
So the extra interest on the increase won't be deductible.
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