Positive to Negative Gearing a property

This is the disadvantage to paying off your property. Alwayus best to put money into an offset account.

You can't negatively gear it now.

If you rent it out also your new loan for your PPOR is non deductible.

What's the status of the IP?

And yes you will pay tax on the rent as you have no mortgage to offset it. Depends where it is in the cycle as to whether it's worthwhile selling. Buy your new IP and put extra money in an offset account (don't make the same mistake twice). When you have sufficient for a deposit buy again.

There is a way to do this but it will cost you in terms of stamp duty and setting up a trust.  I have done it successfully with a previous PPR and it works and the ATO have no issue with it as long as you don't live in it.  If you do live in it then you may not be able to negative gear it as there are a few tax rulings on this area.

Assuming that the existing house is a good un and one worth keeping.  What you could do is set up a trust, the trust then buys the house, you take out a loan in your name to purchase all of the units in that trust.  That way you can maximize the deductibility of the loan and depending on your set up may be able to go 105% on finance.  The purchase price would be the current valuation and the proceeds of the sale would go to you tax free to buy your next house.  This would also be the threshold that would be used in calculating a future capital gain for that property.  It is relatively easy to calculate the negative gearing benefit and work out how long before this would pay off the stamp duty, which should not be more than a couple of years after that the negative gearing benefit is pure cream.  What you have also done is minimise the PPR bad debt which is not deductible.  So in theory you have the two houses same level of debt except the majority of debt is for investment purposes and is teherfore deductible so you have a far higher cash flow position.

The other benefit is that you can buy your next house in a relatively hassle free way ie not depending on the sale of another one.  Make sure you set it up so that you do not live in the transferred house after it is transferred and if you do then be careful about classifying it as an investment property.  I got dinged by the ATO for renting an investment property that my trust owned, it wasn't my ex PPR but they still deemed it to be of a personal nature.

It sounds complicated but its not all the banks do it and its just plain vanilla unit trust, you dont need a financial planner but I would recommend a tax agent though.  Just check if you can refinance the whole amount and get it into your name without incurring stamp duty as Terry W suggested and that would be better way to go, no trust and no Stamp duty. I am in QLD and the trust option was the only way I could make it work up here by having an arms length transaction that would massively increase the borrowings on the property.  From $56k up to $740k.

Terry, do you know if raj can increase the borrowings in his own name up to the total value of the property with half of the property going back to him ie can his current share of the lending also be increased and classified as an investment in that property.

a Borrower cannot just increase their loan and get the deductions. The money needs to be purchased to acquire an income producing asset – such as buying his wife's share. But VIC is one, if not the only state that allows spouses to transfer between themselves without stamp duty – whether for investment or main residence.

In NSW this would only work if there was no consideration and if the wife or husband was being added to title of the main residence.

BTW, I think this is a major reason to invest in property in VIC. Imagine transferring the property back and forth several times over the years as the value increases with this allowing you to pay down the debt on the main residence (but watch out for Part IVA).

Okay I understand that's what I thought. In that case Raj cannot increase his borrowings, but also doesn't need to pay stamp duty a simple calc by Raj will show the pros and cons.  Also depended on who is the highest earner of course.

Hi Raj,

just a thought, but if you really would like to turn your property into negative gearing you may go to a bank or mortgage broker and ask to refinance it. You could then keep both properties and use the loan to buy a new bigger one. it really depends on your financial situation though…