Help with maximising tax

Hi Vick,
You asked this three months ago, and received a very comprehensive answer at the time. Of special interest is the link that Terryw provided you in one of his answers to you.

Can I recommend you go back and re-read the topic :-
https://www.propertyinvesting.com/topic/5037777-asdvise-re-ppor-and-ip-loan-structure/

… and pay special attention to the link in Terry’s reply. In there, he outlines some thoughts re what you might choose to do.

This is unfortunately quite a common occurrence – where a PPOR has had its mortgage all but paid off, and a home-owner then wants to move to another PPOR and keep the old one as an IP. For your future use, DO learn about Offset Accounts and the good they can do you into the future (e.g. who knows, your NEW PPOR might also become an IP in ten years time ….)

My thoughts would be to look at the PPOR (the one you are thinking will become an IP) and run the numbers from two sides – i.e. cost of selling up, or retaining. In selling, you get to keep all of the Equity built up (with no CGT to pay). But there other selling costs that you need to be aware of. What if you sold, maximised your cash, allowing you to put a huge deposit down on your new PPOR, then borrowed against the new PPOR to buy another investment property? That new loan against your new PPOR is then deductible !!

Then again, it could be that the old PPOR CAN become an IP, using its Equity to buy further IP’s, and by borrowing against it to pay its own expenses, etc. Even though it means paying a bit more Tax right now, that may well be offset by any likely Equity jumps. e.g. if it is costing you $2k per year in extra Tax, but it is increasing in value by $20k each year, is that a good trade-off in your eyes? And each time you borrow against it to buy another investment, that new mortgage would likely be tax deductible, thus less cashflow and less tax to pay. Can that work for you – over time?

Terry had commented in that other topic that it is the “purpose of the loan that denotes deductibility, not the asset itself”. What that means is this – simply the act of borrowing against an Investment Property DOES NOT make a new mortgage deductible. It is the purpose that is deductible or not. i.e. what is the loan for?

As an example, if you borrow against the IP (your old PPOR) to pay down the mortgage on your new PPOR, the “purpose of the loan” is to pay a personal debt, not an investment debt – thus that new mortgage would not likely be deductible.

Hope that helps,

Benny

PS Do get a valuation of your current IP prior to making it your PPOR. That is to assign a value in the present day to help in providing its Cost Base when paying CGT way in the future when you finally sell it. CHeck all that with your favourite accountant type.

PPS I’m not an adviser, so usual disclaimers apply!! This is simply my opinion, to get the wheels turning.