Need advice on Refinance/Tax implications

Discussion in 'Accounting & Tax' started by JS-C0nfus3d18, 27th Nov, 2019.

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  1. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    Hi All,


    I am currently looking at refinancing my existing PPOR loan to another bank and have few things to consider before I do so and am looking for an advise that can guide me in right direction. Any help will be appreciated.


    Basically, I currently have a home loan that consists of:


    Loan 1 - $225k - P&I

    Loan 2 - $86k - P&I

    Loan 3 - $187k - Int only that is primarily (and only partially) used for shares investment.


    They all have offset accounts. The value of the property is around $650k.


    My short term goal (mid-next year) is to buy an IP of around $350k using what's left in Loan 3 as a deposit and long term goal (after 5 years) is to hopefully be able to buy an IP of upto $700k using some of my own savings as deposit. I would be buying this second IP with an intention to move in sometime in future.


    In order to do so, I woule like to clarify some doubts as below:


    Should I buy second property as IP or just buy it as PPOR from the beginning?


    What would be the best loan structure when refinancing? Should I go for Interest only or P&I?


    How does ATO determine the owing balance when I convert the PPOR into IP if the loan structure changes?


    Sorry to ask so many questions but I am hoping someone could shed some light here.


    Thanks in advance.
     
  2. Terry_w

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

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    The initial determination is made by the taxpayer. The correct way to determine how much of the debt has deductible interest is to work out how much of the loan relates to the purchase, or improvement of that property.
     
  3. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    Thanks Terry, any suggestion on loan structure considering the future plans?
     
  4. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Ironic. Ask a broker for credit advice but unwilling to seek advice and engaging a broker who gets paid by the lender. The Royal Commission skipped that
     
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  5. Trainee

    Trainee Well-Known Member

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    Depends on your borrowing capacity.

    depends on what you want. Io might be higher rate.

    is there any reason you want to move to a similar value ppor? Usually people upgrade or downsize.
     
  6. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    I am hoping that the property values will have changed in next 5 years, so I may actually be upgrading or downgrading in effect, but I will only be able to afford something around $700k mark at that time.
     
  7. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    Are my questions valid or am I thinking too much here?
     
  8. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Hoping for valuation increase to leverage that through gearing isn't a strategy. It's a geared punt. Times have changed and it's now harder but speculation can be pure right or wrong.

    Regrettably many people make a living from assisting loans so encouraging high debt is a focus that lacks objectivity. The past isn't likely to replicate as easily
     
  9. Lindsay_W

    Lindsay_W Well-Known Member

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    What's your ultimate end goal?
    You're talking about buying an IP for $350K next year (why?) then another property in 5 years time for $700K - how do you know what you will or won't be able to afford to do? Have you spoken to a broker yet?
     
  10. Terry_w

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

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    I have many many tips on this. See my ideal way to structure a loan tip and then get some paid tax advice then credit advice
     
  11. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    It will be my first IP that I am only interested in buying for negative gearing reasons and hopefully to save on income taxes. Why not next year?
     
  12. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    Thanks, will have a look
     
  13. Trainee

    Trainee Well-Known Member

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    so you would buy something with lots of deductions and no gains?

    hard to answer your questions because they are probably the wrong questions. Eg can you borrow for both the ip and ppor later?
     
  14. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    Not quite, but something that's balanced so that I dont have to pay much out of pocket, helping me to collect deposit for the next one.
     
  15. Lindsay_W

    Lindsay_W Well-Known Member

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    so buying a $350K property for ...how much tax deduction?
    Purely buying for a tax deduction/negative gearing probably not a good idea
    Why not go for the $700K property first?
     
  16. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    Because given the uncertainity in market at the moment, I would not want to risk heavy amount of debt. So $350k where if market takes a hit, there will not be as big loss as I would otherwise have to take on $700k.
     
  17. Lindsay_W

    Lindsay_W Well-Known Member

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    If you're worried about the market taking a hit, why would you consider buying? You only 'take a hit' if you need to sell the property - are you concerned about your job security?
    It's an interesting thought process
     
    Last edited: 28th Nov, 2019
  18. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    No but if the vacancy rate goes high, i know i will be able to afford rent payments for small property as opposed to bigger. Noone knows where the market will be in 5 yrs time but if it goes up, i will have equity built up on first IP and if it goes down, second IP may come cheaper. And hence I would like to consider both scenarios in parallel. Hope it clears your doubts.
     
  19. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I learnt an expression in financial markets. You are either a buyer or a seller. You dont buy a low value property hoping the market will fall so you can double down. You sit it out then buy.

    A cheap property will have issues its better counterpart wont have. Families will want to rent a 3/4 bedder. Not a 2 bedder. 2 bedders attract people with low income who cant afford better. But a 2 bedder inner city may have appeal. Some may expect 2 garages and AC etc. Buying into cheap property is asking for vacancy and rent issues. Location location location addresses vacancy. Dont buy in a area where supply is open ended. A cheap property also may not be well demanded by other buyers. Limits its capital growth prospects
     
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  20. JS-C0nfus3d18

    JS-C0nfus3d18 Active Member

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    Guys, I am not comparing $350k property with $700k. Both of them will be in different locations. While $350k seems cheap compared to $700k property, if that $350k is in regional area, it's not cheap.

    We're going off-topic here. I know the locations I would like to invest in and also understand my risk appetite. What I am confused at is the new loan structure so that I could plan for 2 IPs + PPOR in next 5-6 years as well as take maximum tax advantage of current PPOR which in future will become IP.
     

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