Debt recycling one half of a PPOR loan

Discussion in 'Accounting & Tax' started by Bob Mullin, 14th Nov, 2019.

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  1. Bob Mullin

    Bob Mullin Active Member

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    So I've spent a lot of time recently on here reading up, in particular all of Terryw's tips and strategies. They are incredible and I haven't been able to stop thinking about the various ideas.

    One thought I had was that that debt recycling non-deductible debt on a PPOR could be counterproductive if the intention is for it to become an investment property at a later time.

    I wondered whether it would be possible to split a home loan that was used to purchase a PPOR jointly by two people so that one split was Homer's half of the loan and the other was Marge's half. Marge could then debt recycle both of their free cash only in respect of her split of the loan. Then before the property is rented out as an investment property, Homer would borrow to purchase Marge's half of the house and refinance his half of the loan and Marge would repay her half of the loan. Would this make Homer's the portion of the new loan that is referrable to Homer's half of the original loan deductible together with the purchase price for half of the property?

    For example:

    PPOR value $1m
    Loan split 1A - Homer $400k (non-deducible)
    Loan split 1B - Marge $400k (non-deductible)

    Then debt recycle $100k on Marge's loan split:

    Loan split 1A - Homer $400k (non-deducible)
    Loan split 1B - Marge $300k (non-deductible)
    Loan split 1C - Marge $100k (non-deductible)

    Then Homer purchases Marge's 1/2 for $500k:

    Loan split 2A - Homer $400k (used to refinance Loan split 1A) (deductible)
    Loan split 2B - Homer $500k (used to purchase 1/2 of property) (deductible)

    If this also works, this could also be good way of reducing the additional cost associated with IO loans. Homer's split could be IO (to preserve what will become deductible debt) and Marge's split could be PI (given it's cheaper and her split won't become deductible).

    Cheers
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Could potentially work, but needs careful planning and tax advice.

    The other option is to recycle into an offset account so you are not actually paying down the loan
     
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  3. jprops

    jprops Well-Known Member

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    As I read this I thought "too complicated, just shove it in the offset."@Terry_w beat me

    Keep it simple stupid.
     
  4. skater

    skater Well-Known Member

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    This!
     
  5. Bob Mullin

    Bob Mullin Active Member

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    Thanks Terry! Could you elaborate on what you mean by recycling into an offset account? Do you mean just putting spare cash into the offset account? If so, I don't see how that is debt recycling.

    I realise in my original post that I should have said Loan Split 1C is deductible (ie it has been recycled to invest).

    Thanks for your time and patience.
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes, store cash in offset rather than pay down loan. It is recycling because you are reducing non deductible interest and will increase deductions once rented iut
     
  7. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Bob - Your post concerned paying down the PPOR loan. If the loan had a offset and the offset = the loan then there is no interest. So if the property becomes a IP you draw out the offset and use that to buy the new home. The former home (now a IP) has full deductibility on the loan.

    The purpose for the original loan hasnt changed. That loan was used to acquire the former home.
    You have preserved the lloan balance (to the extent you can of course. P&I repayments may reduce it). This is why some people chase IO loans for their own home which can seen counter-productive. They plan to move out in X years
     
  8. Bob Mullin

    Bob Mullin Active Member

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    Thanks Paul and Terry. I agree that that putting spare cash in the offset account reduces non-deductible interest and preserves the loan for when it becomes an investment property say 5 years later. I was just trying to think of a way to also get the benefit of debt recycling for the 5 years while the property is the PPOR (i.e. making the loan deductible while it is a PPOR by repaying, redrawing and investing in shares).
     
  9. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You could also produce excessive income if the market returns are solid. Or a tax loss (CGT loss) if the market moves adversely. The loan however will not reduce.

    Investing money isnt a 100% certain strategy. Debts are fixed. Investments are not. Most people have believed that property is capped and largely doesnt fall. Many people havent seen a modern correcting to floating markets (ie shares, ETFs, managed funds) and may get a serious wake up call when it occurs. Yes. When. Its overdue and could be close or even years off....Who knows.

    Its a issue brokers dont caution clients about when giving credit advice. Switching a debt from capital stable property to a floating market (shares) when the property is used as security doesnt change the fact you can be exposed to loss. Just because its invested doesnt make it a good borrowing.

    I believe if the market corrected soon that we may see a return of the 1987-1991 scenario. Shares tanked. Property rapidly rose defying predictions. People pulled out of the share market and chased property as it was off its highs. Thats the same as our present economy.
     
  10. Bob Mullin

    Bob Mullin Active Member

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    Thanks Paul. I completely agree that debt recycling doesn't make investment in equities a sure thing. The issue for me is that the after-tax return of putting cash in an offset account is the interest rate, say 3%. To get the same return by taking the cash and investing in shares with a 47% marginal tax rate, I would need to get a pre-tax return of 6.38% (ignoring CGT discount). Given those options, I'd prefer to just put it in the offset account as a 6.38% risk free return is pretty decent (not to mention less admin). But if I can debt recycle, the pre-tax return on the shares only needs to be greater than 3% for it to be better than putting in the offset account (which seems pretty achievable).

    If I knew with certainty that there was going to be an equity market correction I obviously wouldn't pursue this strategy (and would make billions doing a big short!), but as you said, who knows. I can only really go off the long-term returns of equities (which are more than 3%), understand the risks, stagger the deployment of funds to reduce the risk of having poor market timing, invest with diversification and have a long-term investment horizon.
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You can still invest using offset funds but need to consider whether to pay the loan down and invest or just use offset funds. Using offset funds will mean more interest initially but once the house is rented out more deductions
     
  12. Bob Mullin

    Bob Mullin Active Member

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    Wouldn't using offset funds to invest incur the same interest as recycling (repaying, redrawing and investing)? The loan amount is the same. It's just that the interest while recycling is deductible but you would then lose that additional deductability when the PPOR becomes an investment property?
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes
     
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