Hi everyone,
My mum is in a very tricky situation now, could any finance expert help please?
She has a unit as PPR which's fully paid off. She is planning to buy a new house as a new PPR and change the status of the unit to IP.
Now she is in the process of getting finance for the new house. Her broker is recommending her to cross-securitize the two properties to maximize her borrowing capacity.
The question is, once she settle on the new house, she will move to the new house and rent out the old unit as IP. Can she use the new mortgage interest payment to offset the rent from the unit in her tax return?What is the best way to organize her finance so that she can offset the rent from the unit to reduce the taxable income? As the unit is fully paid off, can she refinance it still?
thanks heaps!
vivian
Vivian, the purpose for which you mother is borrowing money is not deductible ie it is for her own house. Consequently she cannot claim the interest even though the debt sits on the unit.
If on the other hand you mother sells the unit (which is cgt free if it has always been her ppor) and buys a house and then borrows more to buy an investment unit, then all of the money sitting against the unit would be deductible if it is an IP.
(Your financial advisor could suggest selling the unit to your own trust fund so she doesn't get rid of the unit. This will incurr stampduty & other costs).
Avoid cross-collateralisation – it gives the lender a choice of two properties to sell if your mother defaults on the loan.
Vivian
Scott is correct. Tax office looks at the purpose for which money borrowed NOT the security for loan. If mum's unit is refinanced to buy an IP then interest on this borrowing is tax deductible. Suggest 20% plus costs for IP secured against mum's unit and new loan at 80% secured against IP for stand-alone purchase (ie. avoid cross-collateralisation) . No CGT on unit as PPOR so may make sense to sell it and gear up on another IP while paying down any non-deductible debt on new PPOR.
Graeme Freer
Freer Property and Finance
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Bit more to it than a simple Yes / No.
Does she own the Unit solely?
As SNM has mentioned depending on the numbers she could look at selling the unit into a Unit Trust. Then borrow 100% of the market value plus costs and the entire loan would become deductible. There are some costs associated in the transaction but depending on the value of both the current PPOR / new PPOR, her marginal tax rate and he long term goals for the new property it could be well worth it.
Richard Taylor | Australia's leading private lender
Hi everyone, thanks for the reply.
So my understanding is: if the unit is refinanced and money is used to buy another IP, then the interest payment can be used to offset rental income, as the purpose is not to pay down debt in the new home, Is that correct?
I think you are mis-using the term 'refinance' which may make things confusing. If you have paid off your loan, then there is nothign to refinance. You will be taking a new loan. This applies even if you have paid down the existing loan to $1 and then take money out via redraw – this is reborrowing.
What you said above is not correct.
You will be borrowing money – what will be money be used for? You will be buying a new house to live in, so the interest will not be deductible.
If you took out a new loan to add another bedroom on the existing house and then rented this house out, the interest would probably be deductible. But if you take the money and apply it to a property you will live in, then it won't be.
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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