Hi there We refinanced our ppor and converted it to an ip. Broker setup three loans as follows 1) Two loans where used to pay out existing lender as we had two loans initially. These were set as interest only. 2) Third loan was set as interest and prinicipal and used for equity release and the funds used for seperate purchases not related to the property at all So the property is now an IP so the question is can all three loans be claimed as the total deductible debt? Or do I need to exclude the equity release loan as part of the deductible debt? Confusing I know!
What is the equity release money being used for? If it's a deductible purpose, then the interest on that loan probably is deductible. If the purpose isn't a deductible one, then there would likely not be any tax deductions related to the third loan.
That's usually not a deductible purpose, so you probably can't claim the interest on that equity loan.
Deductibility depends on the use the borrowed funds were put to. If you have ever redrawn from the original loan and used it for something other than that property then your original loan would be mixed and you could not claim the interest in full. If the extra borrowings were used to buy a main residence then the interest on this loan won't be deductible at all.
Simple test. Consider the original loan. Then trace any debits and what each was used for. Then when a refinance (on that day) occurs the old balance and new should be identical (excepting charges or accrued and unpaid interest etc). If the new loan is less than the old loan you have lost deductibility on THAT loan If the new loan is more than the old laon you are limited to the old % based on formula (new loan divided by old loan) BUT... Consider this for each property (being acquired or held) not what is loan security. If two old loans equal two new loans but each loan is a different amount individually but is same overall then there is no issue
Thanks everyone! So it sounds like the two loans are interest deductible and the third loan is not able to be interest deductible as the funds used were used to buy a PPOR. Is there any strategy to convert the third non deductible loan into deductible debt like debt recycling? If it helps I am also considering selling the IP to cash out on equity and re invest and could debt recycle against the ppor. So if there is no way to convert this third loan to deductible debt it may strengthen the sell argument.
My Q is slightly different:- Made a split in loan for the equity pull and tgen invested all in handfull of stocks so Interest is deductable. Now couple of those stocks have done very well and I would like to sell 50% of those (potential CGT event) and use the money to invest in something else. Do I need to transfer the money 1st into loan account from share trading account and redraw to invest or I can do in one go as its the sane broker where I be selling the 50% and buying other securities? I do not want to miss out on the interest claiming part so seeking direction as do not want to mix loans etc to make it complicated.
You don't need to do anything, but if you had borrowed to buy an investment producing asset and sold that the loan used to buy it would no longer be deductible. I would pay the loan back and redraw and reuse it again.
If I release equity (say $200K) from an IP loan and use that equity to purchase a PPOR, I understand that interest on the 200K is not deductible because the 200K was not used for income producing purpose. If if later move out of the PPOR, rent it out and turn it into IP 2, will interest on the 200K then be deductible? If not, is there a way to restructure in some way?
It sounds like you are borrowing to buy a property. If that property was later income producing any loan that relates to its purchase or improvement could have its interest deducted, assuming the borrower and the owner is the same person.
