Hey guys please tell me if I am on the right track. Purchasing IP with interest only loan.
for example finding a property that has potential positive gearing and capital growth. I structure the loan interest only ,so the repayments are low. I rent it out for a price that covers the loan repayments so I have positive cashflow and while renting it out my property increases in capital gains as well than I sell Making profit??
Is this sort of the right track ??
Hi newbie
Yep – that's kind of right. What you've mentioned is a buy and hold strategy which boring investors like myself love.
The idea is to purchase a property that's intended to go up in value (capital gain) over time – and then sell it off for a profit in the future.
If you can find a property that provides long term capital growth – and also pays for itself in terms of the rent covering all costs, then that's excellent.
With interest only loans, the idea is to avoid paying down tax deductible debt when you have non-deductible debt (or are planning on taking it on at some point).
So for instance, if you had a PPOR loan – you'd be best off knocking that debt on the head before you paid down tax deductible investment debt.
You can even take it one step further and preserve the principle balance against the PPOR, set it up as interest only too and make repayments into a linked offset. This gives your maximum flexibility for the future.
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]
Nice Jamie thank you, So for example if I already had a PPOR with principle & interest repayments and than decided to purchase IP with interest only am I disadvantaged in tax??
The Newbie Investor wrote:Nice Jamie thank you, So for example if I already had a PPOR with principle & interest repayments and than decided to purchase IP with interest only am I disadvantaged in tax??Nope – not necessarily.
You're only disadvantaged if you decide to rent the PPOR at some point – because you would have paid down a chunk of the principle (which would become tax deduticble when it becomes an IP).
Check out this article I wrote – it 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]
Hey Jamie
Thank you, I am confused about the tax deductible and non deductible side. So if I had a PPOR with interest and principle loan and decided to buy a new property to live in, would it be bad to rent out my PPOR, be better off just buy and hold strategy and sell it than rent it. Man these structures get confusing on how to buy with IP and PPOR ….
The Newbie Investor wrote:Hey JamieThank you, I am confused about the tax deductible and non deductible side. So if I had a PPOR with interest and principle loan and decided to buy a new property to live in, would it be bad to rent out my PPOR, be better off just buy and hold strategy and sell it than rent it. Man these structures get confusing on how to buy with IP and PPOR ….
Repayments on your PPOR loan are not tax deductible, regardless of whether it's principal and interest or interest only.
Interest payments on an IP are tax deductible.
Hope this simplifies it.
Hi NI,
Jamie is right with this….
Quote:You're only disadvantaged if you decide to rent the PPOR at some point – because you would have paid down a chunk of the principle (which would become tax deduticble when it becomes an IP).… but again, it is something that isn't a major problem. e.g. If you decide you want to move out of this PPOR and rent it out, but have paid heaps off the mortgage while it was your PPOR, there is nothing to stop you borrowing against this for more investments (thus having those new loans becoming tax deductible).
The issue can be, if you are moving out of one PPOR and buying another, then any borrowings for the new PPOR will not be deductible (because it is not for investment). Other than that, anything is fixable – and of course, you can choose to SELL your old IP, thus getting a CGT exempt sale.
Whatever move you choose, do run each scenario in front of your adviser before doing it – and it helps if you can "get a handle on it" from your earliest investing days (hence this post of yours, I guess). Well done – keep on asking until you "get it" !!
Benny
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