Hi all,
Just wanted to ask your opinion about this financing scenario:
1999 purchased IP (Prop 1)
2003 revalued Prop 1 and re-financed to raise funds for other investments
2009 moved in to Prop 1 so it is currently PPOR
2010+ want to purchase a new property (Prop 2) as PPOR but want to keep Prop 1 as IPQuestion:
If I revalue and refinance Prop 1 and put these funds into purchase of Prop 2, is the interest of the mortgage of Prop 1 deductible?If it isn’t are there any ideas of how I could make it happen?
eg purchase Prop 2 as an IP, rent it out for 6/12 months then move in.Thanks all.
Hi timbo,
The short answer is, the deductibility of interest is determined by what the borrowed funds were used for, not the security offerred. If you are borrowing to buy a new PPOR, then the interest on the new borrowing, regardless of the security, will not be deductible.
Any interest you are still paying on the loan for prop 1, will become deductible when it is available to be rented out.
Thanks Dan42…
I guess my question is, how much of the interest for Prop 1 will be deductible?
eg
Current PPOR (Prop 1 – Previously IP but have been living there for 12 months+):
Prop 1
value = 500K
loan = 300K
LVR = 60%
offset = 250K
balance = 50K
80% LVR = 400K
new loan amount = 400KSay I revalue the property to gain access to equity at 80% LVR and use this equity to puchase another property Prop 2, which becomes my new PPOR and keep Prop 1 as an IP:
Prop 2
Value = 800K
Deposit using funds from Prop 1 = 350K
Loan = 550Kso….
If Prop 2 becomes PPOR and Prop 1 turns into IP, how much of the interest paid on the 400K loan on Prop 1 is deductible?
Assuming the balance without the offset is $300K and these funds where originally used to purchase the property then the interest on $300K will be deductible.
Any other equity used for personal purposes will not be deductible.
Richard Taylor | Australia's leading private lender
Assuming $300k of the loan for prop 1 was used to buy property 1.
The extra $100,000 you have borrowed against prop 1 (400-300) is used to purchase prop 2, your new PPOR. Therefore interest on the $100,000 is not deductible.
Interest on the $300k, assuming it was used to fund the purchase of prop 1, or other income producing assets, is deductible.
The offset adds an extra wrinkle, but GENERALLY, funds pulled out of the offset will not affect the deductibility of the loan attached. (Which is why people have offsets).
Thanks Guys, for talking through this with me.
Darn, this is not what I was hoping for…Funny thing is I read about this stuff all the time, but I guess because it is not the outcome I had hoped for it is hard to accept.
To Summarise:
If Prop 2 was purchased as an IP, the full amount of 400K from Prop 1 would be deductible as long as Prop 2 is considered an IP. If I then move into Prop 2 after a period of time (say 12 months), at that point in time the deductible amount is reduced to 300K.Conclusion:
What I am trying to do is use capital growth of an investment for non investment purposes and still claim deductions on the interest. Essentially, this is the same concept (and consequently – flaw) as Living Off Equity.
Alternative?
The only way I can use that money is to sell Prop 1 and pay any CGT and then I can do whatever with the balance. Which brings me to another question:
If I purchased Prop 1 as an IP in 1999 and have lived in it for the past 2 years (it is currently my PPOR), do I still have to pay CGT?
timbo. wrote:The only way I can use that money is to sell Prop 1 and pay any CGT and then I can do whatever with the balance. Which brings me to another question:
If I purchased Prop 1 as an IP in 1999 and have lived in it for the past 2 years (it is currently my PPOR), do I still have to pay CGT?
You would have to CGT on a portion of the sale.
eg: Bought in 1999, lived in for 2 years, CGT percentage = 9/11 = 81.8%
timbo. wrote:Conclusion:
What I am trying to do is use capital growth of an investment for non investment purposes and still claim deductions on the interest. Essentially, this is the same concept (and consequently – flaw) as Living Off Equity.
The tax laws are like swings and roundabouts. You can have an interest deduction for your investment property, but you pay CGT on the sale. If there is no investment (etc, PPOR) then there is no deductions.
You can't expect to get the deductions (swings) without having to pay tax when income or capital gains are made (roundabouts)
Guess I can't have my cake and eat it too…
Thanks for the patient advice, it is much appreciated!
What I am trying to do is use capital growth of an investment for non investment purposes and still claim deductions on the interest. Essentially, this is the same concept (and consequently – flaw) as Living Off Equity.
I have noted the above quote, YES it is possible as you learn the principles of capitalising interest.
What you could do is to borrow money to pay expenses on the investments. This will free up cash you would otherwise have used and this cash could then be used to pay down the new PPOR loan (or into the offset).
Talk to your accountant about borrowing to pay interest.
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
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