Dear loan specialists, I have a question for you. I want to rent out my current home and buy a new home to live in. My current debt on my home is minimal – which is in the form of a line of credit. In order to rent out my current home and rent it out as an IP so that I can negatively gear it, do I need to set up a new loan for this purpose. I am saying loan because I plan to draw equity out of the line of credit to purchase a second property which will then be my Prime Residence. Or can I use my exiting line of credit to draw $ as well as use it for calculation of interest payments for tax purposes (negatively geared property)?? I have read that it is also of benefit to have an offset account attached to an investment loan. Any advice would be appreciated because I want to make sure that I know also tax wise what to expect and how others proceed from renting out their home as an IP whilst moving into a new home.cheers Natasha
Unfortunately you won't be able to deduct any interest on your loan as you will be borrowing to buy a new owern occupied property.
You should seek some tax advice as there are possibly a few things you could do to enhance your situation.
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 Natasha,
As Terry mentioned, any money you redraw to pay for a new property you intend to live in won't be deductible. You would be stuck with whatever is owing on the current loan once it becomes an IP (assuming you haven't used the line of credit for other personal purposes).
Cheers
Tom
What a shame. There goes that idea.
Thanks guys
Hi there
You can still use equity to purchase your next PPOR – that's not a problem.
You just won't be able to claim as much interest against the IP as you'd probably hoped for.
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]
Hi Jamie
That is why i am a tad confused.
If i use equity out of my current home to buy a new prime residence …..and decide to rent out current home i would have to pay tax on rental income. So most people would just sell and move on. However ideally i would like to hang onto the property if i can.Also, if i do that, can i claim a tax depreciation on existing 7 yr old home?whilst living in a new home?
Cheers
Natasha
Hi Natasha
Here's how it would work (generally speaking).
Current property (soon to be IP)
Loan 1 – current loan (becomes deductible – on the assumption it hasn't been used for other personal use)
Loan 2 – Equity release to cover deposit/costs on new PPOR (non deductible)
New PPOR
Loan 3 – Loan to cover the remaining balance of the new PPOR (non deductible)
So the end result is that you can still keep your existing property as an IP and buy a new PPOR – however, you won't be able to claim a lot of interest if loan 1 has been paid down by quite a bit.
For that reason, the loan should have set up as interest only with an offset from the beginning – and instead of paying down the principle, you could have parked funds in the offset, which would have have had the same effect, and then moved those funds onto your next PPOR down the track. This would have bolstered your IP debt back up whilst reducing your non deductible debt.
This article I wrote for API mag explains the concept in more detail.
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]
Hi Jamie
That makes sense. Thanks. Do you know if i can claim depreciation expenses written up by a quantity surveyor against current home once i move into a new house?
Cheers
Natasha
Yep, should be able to once it becomes an IP.
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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