I'm currently having a home loan with offset account for a 2beds apartment, owing 340K, the property value 470K, and the offset account have 300k deposits, which has been used to offset the interest.
Now, I'm about to buy a new house (price 800k, borrowing 664k, i.e 80% of it to avoid insurance) and want to rent it out first for 2 years and then move in as our new home, and then rent or sell the apartment.
So my question is, how I can maximize the tax benefit of the new house for the 2 years when it being rent out, in another words, make it 100% tax deductible during the 2 years investment period?
From my research, if I withdraw cash from offset account (linked to my current home loan) as the 20% deposit to get a new loan for the new house, the new interest generated on the current home loan due to this 20% deposit being withdrawn will NOT be deductible, which means only 80% of the new house is deductible. is my understanding correct? If so, what should I do to make the new house 100% deductible?
Thanks very much for your help!
Hi James
Is your current property an IP or PPOR?
A cash deposit won't be deductible but a borrowed one should be.
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]
Although a cash deposit which was offered as security and borrowed against as a Term Deposit would be deductible.
Of course whether you would want to is another matter.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Current property is PPOR, what shall I do in terms of ＂borrowing" you mentioned?
james.jj wrote:Current property is PPOR, what shall I do in terms of ＂borrowing" you mentioned?Typing from phone so apologies for errors.
Instead of using cash from offset to cover the deposit/costs on your next IP, you could look to inject those funds into the ppor loan and then re borrow as a separate loan split. That way, the deposit/costs become deductible.
Will you hold onto your current PPOR as an IP once you move into the next property?
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, Jamie. Do u mean I shall use cash in offset account to pay off part of the PPOR loan first, and then split it to two separate loans, where one is still PPOR loan but smaller amount and the other one is for the deposit of the investment house? But what the 2nd one looks like? Is it called LOC loan?
after 2 years, the current PPOR may be rented out as investment while the investment property might become PPOR instead.
James
Hi James
Yes make a principal reduction to your PPOR from your offset account and then take out a equity sub loan and use this as deposit for the IP.
Keep the loans separate and the interest on the entire 2 loans will be deductible.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
james.jj wrote:Thanks, Jamie. Do u mean I shall use cash in offset account to pay off part of the PPOR loan first, and then split it to two separate loans, where one is still PPOR loan but smaller amount and the other one is for the deposit of the investment house? But what the 2nd one looks like? Is it called LOC loan?Spot on. The second loan can be a LOC or interest only loan.
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]
"Yes make a principal reduction to your PPOR from your offset account and then take out a equity sub loan and use this as deposit for the IP. Keep the loans separate and the interest on the entire 2 loans will be deductible" I second the motion! I guess this is the best thing to do James.
Thanks a lot Jamie/Richard/Leadercorp. Really appreciated your advice!
For the equity sub loan , I should be able to get a lump sum from bank so I can pay directly the deposit of IP to the vendor, is it right?
My current bank is persuading me to get a cross-collatteral loan to get 100% loan of the IP, from my research, cross-collatteral loan seems not to benefit borrower but the banker, is that right?
The other thing is, If one day I move to the new investment property as my PPOR and keep the current PPOR as an investment, then the principal I already pay from offset account now won't be deductible from then, is that right? Any better way that allow me to achieve both? for example, can cross-collateral do that?
another big question, if I want to do some innovation on the IP(for example kitchen/bathrooms/curtains/floors, etc) before renting it out, can these innovation costs be tax deductible and how?
Thanks again,
James
Hi James
Yes you should be able to get your own Bank to provide the equity loan but make sure you make your principal reduction conditional upon them approving the sub loan.
Last thing you want to do is pay the loan down only to find they wont approve and no you are snookered.
Do not i repeat do not cross collateralise the securities as it will only lead to issues down the track.
Personally I would probably use a separate lender to keep things clean.
Some excellent basis rate products doing the rounds at the moment without the Annual fees etc.
You can always switch products when you move in and have the need for the offset account and other loan features.
In regards to the interest claim and whether you pay down the current PPOR debt and then keep it as a investment unfortunately you can't have it both ways.
Only way would be to incur LMI on the investment purchase which is Tax deductible whilst the property is available for rent (Over a 5 year term or the term of the loan whichever is the shorter).
If you are thinking along this line however you are probably better off to get your Broker to run some scenarious as now the figures could change a bit.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks very much Richard. It appears that in long term if I want to rent out my current PPOR for a longer period than the new IP in future, I would be better off to use cash in offset rather than paying off first and then withdraw from the sub equity loan to pay deposit of new IP so that this amount of money can be deductible for longer when current PPOR is changed to an IP. Am I right on this?
Cheers,
James
That is correct as the $160K or so in the sub loan would only be deductible for the first two years, while the same amount would be deductible after that for as long as you then held onto the property as an investment.
There is the other option similar to what Richard mentioned but in addition you could take out equity against you current property to the maximum of 90%. Would give you about $80K on your current property estimate which you could put towards the new IP which would be tax deductible for those 2 years. When you decide to move into it, then you can just pay down that $80K split, and it would still leave you the $340K outstanding for future deductibility. Doing this would incur LMI so just as mentioned previously, you would need to run the numbers to see whether it would be worthwhile.
Cheers
Tom
Hi James
Best to use one of the brokers that have already responded to you in this thread to arrange your finance to ensure it is done properly. All too often we see people coming on here getting answers from those in the know and then trying to relay the knowledge to an inferior local broker. Makes no sense at all to do that.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
I definitely agree with Tom here! On the other hand, JacM is right. You should contact a broker that can assist you in your venture.
Thanks for all the advice!
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