Hi all
The recent a post prompted me to ask the following…
(post: https://www.propertyinvesting.com/forums/property-investing/help-needed/4330490?highlight=PPOR%2Cto%2CIP)Can I claim the interest expense on the whole loan(s) when I convert my PPOR into an IP when I also use some of the equity as a deposit for another IP?
Scenario:
We currently live in our PPOR which has market value of $430K, with a loan of $380K plus a LOC of $20K, both are interest only. Towards the end of this year we want to move out and go rent, turning our PPOR into an IP. When we do this I want to leverage ourselves into another IP (IP#1).What I am thinking of doing is extending the LOC so we have access to the maximum value of the house (at our current 95% LVR). If the value of the house is say, $450K, we should be able to extend the LOC to say $40… thus drawing out $20K. This we can use along with the money we save (say $10K – $20K paid down in the LOC) as a deposit for another IP(IP#2) (a townhouse or cheap house).
What I would like to achieve is to ensure that the interest on both loans (the primary loan on IP#1) and the line of credit are both fully deductible expenses (in producing assessable income). I know both investment properties will unlikely be / difficult to get to cash flow positive straight off… but i am also looking at lease options, etc for this.
I would very much appreciate feedback from the gurus, experienced and regulars… I am reading as much as possible, and particular find your input on this forum great (thanks).
Regards,
Andremaviblue wrote:Hi all The recent a post prompted me to ask the following… (post: https://www.propertyinvesting.com/forums/property-investing/help-needed/4330490?highlight=PPOR%2Cto%2CIP) Can I claim the interest expense on the whole loan(s) when I convert my PPOR into an IP when I also use some of the equity as a deposit for another IP? Scenario: We currently live in our PPOR which has market value of $430K, with a loan of $380K plus a LOC of $20K, both are interest only.Depends on when you convert to IP. You most likely will have to prorata the days interest was charged in the financial year for private use and then subtract it from the total years interest. Unless you convert on 1/7/2010
If the 20K LOC has been used to pull out 20K for private use then you cannot claim interest on it.
I am assuming you have taken 20K out for private use as a 20K LOC could be a facility to be able to borrow 20k with no debt on it.
If the 20K was used to earn income for the 20k LOC debt then it may be claimable as an expense against earning income.
The point is the loans are separate entities so the purpose of each loan determines whether each loan is a deductible expensemaviblue wrote:Towards the end of this year we want to move out and go rent, turning our PPOR into an IP.You are changing the use of the property and now have to decide if you want to keep the PPOR / Main Dwelling CGT Exemption
as you are renting somewhere else it would be worthwhile looking into the 6 year rule.
http://www.ato.gov.au/individuals/content.asp?doc=/content/36887.htmmaviblue wrote:When we do this I want to leverage ourselves into another IP (IP#1). What I am thinking of doing is extending the LOC so we have access to the maximum value of the house (at our current 95% LVR). If the value of the house is say, $450K,Above you said it was $430 k ?
At 450k it would be 27K more to be 95% LVRmaviblue wrote:we should be able to extend the LOC to say $40… thus drawing out $20K. This we can use along with the money we save (say $10K – $20K paid down in the LOC)Don't understand paid down. I am assuming that you are saving money into the LOC account to pay down the debt component.
If you have a debt component that is private and then mix it with investment debt in an LOC it gets really messy to work out which part of interest charged is private use and which part is investment use.
I recommend you talk to the bank and see if you can resize the LOC if it has been paid down to a smaller limit and then open another LOC with say a 30K or 40K limit for investment purposes to make tax time easier.
Your bank may allow more than one LOC account I myself have two and could have upto seven with my bank.Another important point you may have not considered is STAMP Duty and MORTGAGE INSURANCE on you next IP purchase that you may incur.
Deductibility depends on what the funds borrowed are used for.
You want to borrow money to use as a deposit on any owner occupied property. So the interest on this portion won't be deductible.
I also doubt you would be able to increase your loan to 95% because of the credit tightening.
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
Hi guys.
Thanks for your awesome replies (and sorry for my delay to say thanks… been away in the sun!)duckster wrote:If you have a debt component that is private and then mix it with investment debt in an LOC it gets really messy to work out which part of interest charged is private use and which part is investment use.
I recommend you talk to the bank and see if you can resize the LOC if it has been paid down to a smaller limit and then open another LOC with say a 30K or 40K limit for investment purposes to make tax time easier.
Your bank may allow more than one LOC account I myself have two and could have upto seven with my bank.I was intending to pay down the existing LOC to $0, then use it for a deposit on an IP… and that way things are less messy. But I like your suggestion better, and thanks for that. I’ll talk to my mortgage broker about doing this.
Also thanks for the 6 years tip. I recall it now from my uni studies, and may look at moving back in a 4-6 years down the track (rather than rent as we intend), so I can take advantage of the GCT concession.
Terryw… I’ve been told by my broker that 95% LVR is possible via my existing bank (CBA) as I am an existing customer. But I’ve noticed that these things tend to change quickly.
Thanks guys. The plan is slowly coming together, and I’m really keen to get things moving.
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