Upgrading a PPOR using Equity

PeppersGhost wrote:

Sorry if this has been covered a myraid of times, please point me to the discussion if it has. I received some advice today that caught me by surprise, thought I would check its validity here.. understanding the collective IP IQ here is astronomical! Hypothetical situation: If I have a property worth $500k I owe $100k on it (the debt has been reduced over a period of years) I want to upgrade and buy a new PPOR (say$750k), and keep the old property as an investment. My belief was that I could use the Equity in the old property ($400k) and move it to the new PPOR. The old property is now an IP – and after refinancing, it has a debt against it of $500k. All the interest payable on this $500k is tax deductible.

Not Claimable – It is a Good way to get an Audit by the Tax department
There must be a direct nexus (means connection its the wording in the Tax law ITA1936) between
The income producing asset and the loan used to acquire the income producing asset.
You are borrowing money of 400k to use for a private use being your new PPOR so there is no nexus with the rental property (previous PPOR)
.

  GOOD ADVICE !!

Yes
This is if you really want to negatively gear it
Don't rent out the property Sell it ! (This is known in Steves book as releasing locked up equity)
Then put most of the equity into a new PPOR and then buy another investment  property with less deposit either some of the released equity from the sale or setup an LOC against the new PPOR for the loan for the deposit for investment property.
Why because you do not have to pay CGT as Exemption for PPOR.
Yes you have to pay sales commission and then stamp duty when you pay the next property but you now have an investment property geared at 80%
This is if you really want to negatively gear it

Yes if you want to maximize negative gearing.
However you may want to positive gear the original PPOR as an investment Property, however you would require it to be re-valued to work out a cost base for when you sell it in the future for record keeping requirements.
Why you might want to positive gear it.
When you make  say as an example a $10,000 loss for the year you get back 40% if you earn $90,000 a year
When you make  say as an example a $10,000 loss for the year you get back 30% if you earn $70,000 a year
When you make  say as an example a $10,000 loss for the year you get back 15% if you earn $34,000 a year

So if you are on 30% you lose $7000 a year as you get $3000 back unless you can claim depreciation.

When the Henry report is used to alter taxation law the information above may become bollocks.

1. Yes, correct
2. Yes there are a few options
 a) sell it
 b) sell your half to your spouse, he/she borrows to buy and the interest on this portion will be deductible. No stamp duty in some States
c) sell to a discretionary trust you control. Trustee borrows the loan and loan interest is fully deductible, but losses are trapped in the trust. Extra land tax may be payable in some states, NSW etc.
d) set up a LOC on this property in addition to your original loan. Use the LOC to pay all expenses on the property including interest. This will increase your deductions and free up cash to divert into your new PPOR loan. This needs to be set up carefully so as to be acceptable to the ATO and you will need specialist advice.
3. not necessarily.