1st Post - Recently purchased home now a potential investment

Hi everyone, I'd really appreciate some guidance...

I spoke to the bank about possibly re-financing our current home (purchased April 2016) to 80% of my current home's value, shifting that 80% back into a personal account (i.e. taking back the bulk of cash I used to purchase the home), with view to rent it out as an investment. Our mortgage is currently $1.

NAB suggested 'that's easy, yes we can do that'

I would then like to use that 80% for the purchase of a home in USA since we're spending so much time there, or simply off-set the mortgage and just have it there, available for later use... we already have about $245,000 available for re-draw so it's nothing new.

What are the implications of doing this in terms of taxation, finance, law etc.? Please don't hesitate in asking for further details to make sense of this situation... I'm new

 

Hi Marc, welcome to the forum

It should be easy enough to do providing income is okay and so on - ideally, put the funds in an offset account or even better create a line of credit, and you'll pay no interest until you use it.

One thing to be aware of is that if you use the funds for a new PPOR in the US (or anywhere, for that matter) the interest on the loan will not be deductible as the purpose of the loan funds were a non-deductible purpose (buying a home).

 

Any redraw/equity release will be considered new borrowing by the ATO so you'll need to consider how tax deductibility will be treated. if the funds are used for an investment use then you could potentially claim the interest, otherwise it would not be deductible. Best to get specific tax advice on your situation.

 

If debt is fully repaid and property will no longer be PPOR and will be IP, could look into selling the property to another entity - borrowing funds to do so creating deductible debt. Using sale proceeds to buy new PPOR

 

I'm trying to wrap my head around this...

So if I purchased my home with an 80% loan to begin with and then decided to rent it out as an investment, the interest on that loan is deductible...

But because I purchased the home with just a 40% loan and promptly paid all but $1 off - allowing for substantial re-draw if/when needed - I did a disservice to myself?

 

Yes - funds would likely have been better served in an offset account instead of going off the balance, would have had the same affect on the interest but would have kept the funds available at call without impact on taxation.

 

Even though I can log into my online banking right now, re-draw that $245,000 with 1 click and send it wherever I want?

 

It's the 'where ever you want' that's the issue.

You've paid off your home loan.

What ever you do with the repaid funds via redraw/refinance is counted as new borrowing and will only be deductible if the funds are used to purchase something that allows interest to be deductible - like an investment property, or shares.

 

OK thanks so much for clarifying. I'll need to figure out what exactly it is I want to achieve before I go any further.

 

No the debt is gone few different options
1. sell house, use cash to buy PPOR, use equity in new PPOR to buy IP
2. sell house to spouse, they borrow, use cash to buy PPOR
3. sell house to seperate entity, borrow under that entity, use cash to buy PPOR

 

Or just keep it as a very cashflow positive property in your portfolio.
Perhaps buy a few more NG properties and use them to offset the gains if paying tax is what keeps you up at night.

 

Yes can I simply re-draw equivalent of 20% down payment for another investment property and then THAT new investment property has the 'normal' investment loan with deductable interest etc?

 

@Marcfromperth yes could redraw 20% + costs for the purchase of investment property, the debt should then be tax deductible.

In the case of having no residential debt, could this be a time that capitalising of interest would be something that ATO would be okay with with private ruling, using something along the lines of cashflow. Thoughts @Terry_w @Paul@PFI