First time poster - yet another PPOR to IP question

Discussion in 'Accounting & Tax' started by k3nsh1n78, 21st Jul, 2020.

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  1. k3nsh1n78

    k3nsh1n78 New Member

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    28th Jun, 2020
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    Sydney
    Hi all,

    Newbie here so please be gentle...

    I intend to convert my PPOR to IP in the next few months so I'm trying to figure out how to structure the loan correctly. Here's the story:

    Purchased PPOR - purchase price 500k, 350k P&I loan @3.59%
    Refinanced - valued at 550k, 380k P&I loan at 2.79% (used 30k to pay off existing car loan).
    Paid down roughly 10k principal so far, amount owing currently ~370k P&I @2.44%

    Hoping to refinance to IO only soon as part of the strategy converting the PPOR to IP. This is where it gets confusing since I'm not sure how to structure the loan correctly to maximize IP deductibility:

    a. Valued at 550k, borrow 440k (80% LVR) IO only. My worry with this scenario is that I had used 30k to pay off the car loan so maybe not all 440k is deductible?

    b. Valued at 550k, borrow and split 350k and 90k (still 440k total, 80% LVR), as 350k is the original loan amount owed when I acquired the property, and 90k is to be used to debt recycle in shares/ETF. So interest on 350k is deductible against IP, interest on 90k is deductible against dividend income?

    c. All of the above is wrong, please enlighten me?

    I understand I need to get proper tax advice, which I will do, but I thought since there are so many smart and experienced community members, perhaps I can leverage the knowledge of the community to understand the topic better.

    Thanks for reading, anything you guys can share would be greatly appreciated!
     
  2. Terry_w

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

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    1. work out the relevant portions of the loan - $350k won't be a correct amount as the loan is PI and you have paid extra
    2. split it so the car loan is under a separate split
    if borrowing extra this should be under a 3rd split
     
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  3. k3nsh1n78

    k3nsh1n78 New Member

    Joined:
    28th Jun, 2020
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    Location:
    Sydney
    Thanks Terry, I think I got it...

    Just to check my understanding, when you say work out the relevant portions of the loan, I can use the ratio of 350k/380k (~92%) and 30k/380k (~8%) to apply the 10k principal reductions?

    If it's right, then the loan will look like this?
    Split 1: IP - 340,800 (IO) deductible
    Split 2: Car loan - 29,200 (P&I) not deductible
    Split 3: Shares/ETF - 70,000 (IO) deductible
    Total 440,000 (80% LVR)

    I'd probably need to work out in exact detail the portions, but would you say I'm on the right track?

    Thanks!
     
  4. Terry_w

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

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    yes that is possibly a good way to do it, assuming you hadn't ever made any other redraws from the loan.
     
  5. k3nsh1n78

    k3nsh1n78 New Member

    Joined:
    28th Jun, 2020
    Posts:
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    Location:
    Sydney
    Awesome! Thanks Terry, very clear to me now. Much appreciated!
     
    Terry_w likes this.

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