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Knockdown duplex rebuild - tax question

Discussion in 'Accounting & Tax' started by shorty, 23rd Aug, 2015.

  1. shorty

    shorty Well-Known Member

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    I'm knocking down my PPOR, hopefully later this year, to build a duplex - one to live in, one to rent out.

    I've got pretty much equal parts cash (currently in PPOR offset) and equity (already financed, sitting in offset account against equity loan). The two properties will be similar, using similar land and buildings of similar size. I don't want to contaminate my equity loan by using it for PPOR purposes, but I would like to maximise the cash I have left after the build. If I, for instance, paid 45% of the pre-construction expenses (planning, drawings, 20% of hard construction costs, etc) from equity and 55% from cash, would that be a relatively safe way to ensure that I am able to deduct all the equity interest without contaminating the equity loan?

    I'm saying 45/55 because there could be a slight variation in the end values for the properties.

    Hope that makes sense.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No it wouldn't work like that. I guess your land won't be subdivided so you would have a big pool of costs and i would be hard to borrow for the investment portion while using cash for the owner occupied portion.

    The best way to do it would be to borrow 100% and then split the loan on completion and then pay down/offset the owner occupied loan. Don't use your offset cash at all if you can.
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Hi Terry, in this case, being one big pool of money which is then split, if you paid off one of the split loans would it not come equally off the OO and IP loans as it's all actually money used for one property (title?) No matter which way you slice and dice it?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Hi Jess

    I don't think so because once the loan is split you can attribute each loan to the relevant portion. Each could then be independently paid off without effecting the other portion.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The final result would require that there be two CGT assets at the end:

    - PPOR portion (land) .
    - New build portion.
    I cant see any reason why the cost base would not be equal in the example if each duplex is of similar size. The original land would also be uniform and likely 50/50. On that basis:

    1. Of the original loan 50%/50% would relate to the old acquisition (land) and that land would have a cost date and cost base determined by the original acquisition etc
    2. The new build and any new loans (split 50/50).

    As there is a single CGT asset being constructed on the land I cant see any way for you to gear the borrowing towards the IP portion. If you were building two villa's etc then its possible you could have two separate contracts. Two invoices etc.

    You cant obtain split invoices for the build as its a single CGT asset and apportioning based upon USE always applies. ie 50% is non-deductible as its a PPOR. You cant even refinance as its a single title. You cant repay yourself.
     
  7. shorty

    shorty Well-Known Member

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    Edit: should have just read Terry's tax tips.

    Thanks Terry and Paul. Just for anyone else reading this, I was taking about a subdivision, which was answered in Terry's tax tip.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Same principles apply as in my tax tip above.