Investment splits for tax - does it matter which property

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.

 

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.

 

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

 

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.

 

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 ?

 

I wouldn't want to incur LMI unnecessarily.

 

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

 

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.

 

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

 

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.

 

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

 

See
Tax Tip 36: Consolidating Loans for investment properties

 

Thanks Terry