Investment splits for tax - does it matter which property

Discussion in 'Accounting & Tax' started by Madcatters, 19th Oct, 2019.

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  1. Madcatters

    Madcatters Active Member

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    Hi all, have a quick question regarding claiming investment money and if it really matters which property it’s claimed against when repurposing PPOR to IP.

    My loan situation now
    - PPOR
    - PPOR split 1 - IP 1
    - IP 1
    - PPOR split 2 - IP 2
    - IP 2

    Currently split 1 and 2 the interest is claimed as a tax deduction against IP 1 & 2 respectively along with the loans against IP 1 & 2.

    What we are thinking of doing is renting out our PPOR and then claiming the interest for loan against for our PPOR as IP expenses. What id like to do is remove the splits. Given all 3 properties would be IPs, can split 1 and split 2 be incorporated into the loan against our current PPOR and the new combined balance interest be claimed as an expense against PPOR (to be IP 3).

    We would rather try not refinance the two current IPs and bring the splits into those loans as we won’t have 80% equity in each of those properties once the split is brought back into the main loans for those IPs.
     
  2. Marg4000

    Marg4000 Well-Known Member

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    I don’t think you can do that.

    Deductions have to be claimed for the property that incurs them.

    If you could lump all the loans together, what happens when you sell one property? How do you keep track of exactly what part of the combined loan relates to that property? Technically all the loan is on a different property so you would be in a real mess.
     
  3. Madcatters

    Madcatters Active Member

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    I’m trying to remove the splits without refinancing the two IPs.

    Essentially the loan for the PPOR would be
    $100
    + $20 for IP1
    + $20 for IP2

    = new loan of $140 where all interest is claimed against PPOR turned into IP3

    IP 1 & 2 no longer claim the interest for what was split 1 & 2
     
  4. Terry_w

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

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    Interest is only deductible against the income it relates to. If the ownership of all the properties is the same, and assuming all interest is deductible (which is a big assumption) it wouldn't matter too much if you get this wrong as there is no tax difference.
    But you should stil maintain splits as what will happen if you move back into one. or sell one.
     
    Ross Forrester likes this.
  5. Madcatters

    Madcatters Active Member

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    Thank you Terry.

    Should I instead want to remove those splits by refinancing the properties they relate to, which will require entering LMI territory - would there be an issue claiming the LMI interest given LMI wasn’t required for the initial loans ?
     
  6. Terry_w

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

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    I wouldn't want to incur LMI unnecessarily.
     
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  7. shorty

    shorty Well-Known Member

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    Why do you need to combine the splits? Sounds like a way to create a problem, not solve one.
     
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  8. Madcatters

    Madcatters Active Member

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    Want to buy another IP
    Currently have 5 loans / splits against 3 properties.
    Also coming off IO soon.

    Want to simplify it a little by having 3 loans against 3 properties before buying our fourth.
     
  9. shorty

    shorty Well-Known Member

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    If you keep the splits, you just have to add A + B at tax time to calculate your interest deduction.

    If you combine them, and then the purpose of one of the properties changes later, you've then got a blended loan which is an administrative headache.

    IMHO it makes more sense to keep the splits
     
  10. Madcatters

    Madcatters Active Member

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    Thanks all for your support.

    I’ll keep the splits to avoid administrative issues.

    If I refinance the loans which the properties are secured against for a higher amount, by the total of the split and close that split - is this clean as far as tax purposes?

    That is :

    IP loan $100
    IP split secured against PPOR $20

    New IP loan $120
    IP split secured against PPOR now $0 and closed

    Then as far as tax goes, the interest is only claimed against the new IP loan - not loan and split.
     
  11. Terry_w

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

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    If both splits had the same use then you can combine them
     
  12. Terry_w

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

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  13. Madcatters

    Madcatters Active Member

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    Thanks Terry
     
    Terry_w likes this.

The shift to the regions has been quite profound with Millennials and Gen X leading the way. It seems affordability, lifestyle, and working from home have been the key drivers from which these generations have been able to take most advantage.