So this is the situation, my current ppor1 (wife and I) we owe a little under $105k with a p&i loan I want to keep it and turn into ip1 (use the rent to contribute to ppor2 mortgage). We also have a block of land (my wife's mothers land and needs to be subdivided (originally to be inherited but we can use it if we want)) about $110k+ in equity that we want to build our next ppor2 on.
My idea is to use the equity in the land to payoff the existing ppor1 loan, then build the ppor2 on the land using the equity in the ip1 to help finance. Then later use the equity in the ppor2 for the next ip2. I want to use a io loan with offset account to put the rental earnings and extra contributions into fund the future ip's to come.
– Does my idea work?
– Is there tax implications that I have not thought of?
– Would there be any implications for my mother in law or nil as it is inheritance?
– Is it better for the land to be inheritance or would it be better to buy the land for the most minimum price allowable to save on any tax penalties?
– Will the rent earned from ip1 be classed as earnings hence be a tax liability?If you can answer these questions or think of a better senario to maximize the benefit please let me know.
I hope all this makes sense.
Cheers
Why pay off an investment loan ? This will mean you have a higher loan on your main residence and will pay higher interet which will not be claimable.
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
Totally agree with Terry – you shouldn’t pay off an IP debt if you have a PPOR debt.
The rent received from your IP will be added to your taxable income – and because you’ll have no interest to claim (if you pay it off) then it will be positively geared by quite a bit (because you only have other expenses/depreciation to claim).
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks for your thoughts, the theory behind the madness was to have the additional income coming in. Say if the rent would return approx. $180 p/w would the the return on the interest/tax be a better? I am open to suggestions if anyone has any.
wade anthony wrote:Thanks for your thoughts, the theory behind the madness was to have the additional income coming in. Say if the rent would return approx. $180 p/w would the the return on the interest/tax be a better? I am open to suggestions if anyone has any.What about if you wanted to buy a house to live in later? You would have money tied up in an investment and would have to borrow it to get access. Not very tax effective.
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
Thanks Terryw, So if I used the equity in the block for ppor2 would I be any better off? Sure the interest would be lower but I would also have 2 loans with most if not all of the return from the ip going back on to the loan with no passive income. I'm a novice on how using equity works but want it to get the most out of it. Would my idea not work or would I be doubling up on loans somewhere? Any suggestions? Cheers
Just remember investment loans are tax deductible, private loans are not. Deductibility depends on what the borrowed funds are used for.
So your aim should be to pay off a private loan first, and then start on paying down an investment loan after that.
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 Wade
I’m having a little trouble understanding what you’re doing.
The easiest way to think about the ideal structure (from a tax perspective) is to have your IP debt high and your PPOR debt low. This is an extremely general comment but might help shed some light on your situation.
Therefore, if you’re looking to allocate funds to pay down a particular property – it’s your PPOR.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
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