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Deductible vs. Non-deductible question

Discussion in 'Accounting & Tax' started by SVH, 13th Nov, 2015.

  1. SVH

    SVH New Member

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    Hi all

    Can someone please explain to me how this works as I can't quite wrap my head around it.

    As background:
    Current PPOR on an IO loan of $240,000 ($270K purchase)
    In the last 3 years, let's just say this property has increased in value by $100,000

    I now want to use the $100,000 equity to go towards the deposit of my next PPOR so loan becomes $340,000
    I then turn the current PPOR into an IP, and collect say $300 rent per week.

    Monthly repayment becomes ~$1800 per month, the property is now negative ~$600 per month (more with rates etc).

    I believe the additional $100K is non-deductible so my question is, on the $600 per month, how much of this is deductible? Is it just the % split, so 70%?
     
  2. Blacky

    Blacky Well-Known Member

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    Ok
    If you set it up correctly all of the existing should be deductible.
    Current loan is $240,000. Leave this as it is.
    New loan (split) is $100,000. This is non-deductable.

    Assuming 5% interest rate
    $240,000 = $1,000pcm
    $100,000 = $415/pcm
    Rent income = $1,200pcm (gross).

    This is provided that you havent re-drawn any funds previously on the current loan.

    Blacky
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I wouldn't include the cost of the $100k in your calcs, as it's personal expenditure that's not related to your IP.

    All the interest on the $270k original PPOR debt is deductible once you turn it into an IP.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Current loan is $240,000
    New loan is $340,000

    Deductible interest = 240,000/340,000 = 70.6%

    i.e. 70.6% of the interest incurrred on the loan would be deductible. Assuming you had never paid any more off the loan and never had previously withdrawn from the loan.

    But you should not do this.

    You should just split the loan and have another $100,000 split so you are not mixing purposes.
     
  5. wogitalia

    wogitalia Well-Known Member

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    Yep, agree with Terry here.

    The original 240k loan is deductible when it becomes an IP and should be kept separate.

    The new loan of 100k is for private purposes and non-deductible and should be kept separate (it could become deductible in the event you do the same in the future with new PPOR).
     
    Terry_w likes this.
  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If SVH has a spouse there is a way to make loans of $305K deductible in NSW....Sell 50% of the property to spouse at price of $185K (50% x $370K) before its rented. Spouse borrows 100%. You use the $185K to repay $120K and keep $65K cash. Use if for new IP.

    Now the property has $120K + $185K loans = $305K
    No CGT ?
    No duty ?
    Minor legal costs.......Interested call Terry.

    The outcome from this is $65K comes out as an increased deductible loan. Not a scheme.
     
    MattA likes this.