Negative Gearing - Tax Question

Hi Guys,

I currently live in a prop worth 600K that I have paid off - I have not closed out the Loan.

I am now wanting to buy a new prop to live in worth say 1 Million (as an example)

I want to remortage the 600K property and borrow 400K for the new property and move into the new property.

I then want to rent out the 600K property and have the loan as interest only. Can I then negatively gear the 600K property?

I will go and ask a tax accountant but keen to hear people's thoughts.

Jackie

 

No, the law on this is clear and the interest will not be deductible.

 

Hi Terry,

Thanks so much for your help, I suspected this was not possible. I am wondering though can one ever turn a primary residence into an investment property?

Say for example I have a property that I owe 300K on that I live in. I then go overseas for 2 years. Can I turn that property into an investment property while I am away?

Thanks for posting a link to your website. I think a book on tax and investment property would be good to read !!

Cheers

Jackie

 

Hi Jackie

You can still turn a main residence into an investment property - but you may not have as much to claim.

But there are some strategies you could potentially implement such as sale to a spouse or related entity which could borrow to buy it off you. That way the interest would be deductible as it relates to the purchase of an investment property.

See
Strategy: 11 Strategies for when you move out of the PPOR and keep it https://propertychat.com.au/communi...n-you-move-out-of-the-ppor-and-keep-it.11311/

 

Thanks Terry so much for your invaluable help !

 

Jackie

There may be a strategy to sell to a partner and they borrow that money. No duty on the transfer. It should be CGT free if its always been your PPOR. You can use that money to buy a new home and its now a deductible loan. However the deduction is to the new owner and they would rent it and get the neg gearing (?) outcome. This example is only for Victoria and other states may limit the concession to 50%. Personal tax advice may identify strategies to consider.

Hot Topic: Does your relative pay stamp duty if you transfer a property to them? | State Revenue Office

 

See
Tax Tip 103: Transfers Between Spouses and Stamp Duty in VICTORIA https://propertychat.com.au/communi...ween-spouses-and-stamp-duty-in-victoria.9406/

 

Hi Terry,

I was told yesterday by someone (an accountant) that I can do this strategy ie negative gear if I have an Offset account for the 600K property (which I do). They said if I had a redraw facility I could not negative gear. I am quite sceptical of this given the feedback I have had so far.

Jackie

 

When things like this happen ask the accountant to put it in writing - just in case. They will soon double check and then change their view.

Or perhaps you mistunderstood what he said, or she misunderstood you. If you hadn't paid down the loan but instead save in the offset then since you hadn't paid the loan down the interest on the full loan would be deductible.

 

Hang on, if you have an offset account how have you paid off the loan?

What is the loan balance?

 

By my reading the op is confusing a loan account and an offset acct.
In her mind the loan is repaid as it is 100% offset.

In actual fact she has a $600k loan and a $600k offset balance.

Therefore, yes, you can use the $600k cash in the offset for the new purchase and still claim the $600k loan interest as a deduction when the existing house is rented.
However I would speak to a broker to see how to structure things a bit better to avoid costly mistakes in the future.

However, I may have misinterpreted the OP.

Blacky

 

We had better wait for clarification.

 

Hello Terry,

Apologies for being unclear. Here are the details.

Purchased property (flat) for 385K in 2007 and had a loan from Bank A of 250K. There was no offset account at this stage. Flat has been valued at 600K.

Paid the loan right down to virtually zero but did not close the loan off with Bank A and did not get the property title.

In 2016, Changed banks from Bank A to Bank B, in anticipation of buying a house.

A loan was taken from Bank B for 500 K. There is now +500K in an Offset account and -500K in a Home loan account with Bank B.

Apparently interest doesn't have to be paid to Bank B until the money used.

The eventual hope is that when a new house is purchased, then the 500K will be an interest only loan, the flat will be rented out and negative geared. A new home loan will also taken out for 400K to purchase the house.

Hopefully this is a bit clearer, I should have been specific from the start.

Jackie.

 

Hi Jackie

IN that case the interest won't be deductible once you rent the property because it doesn't relate to a loan that was used in connection to the acquisition of the property.

You would be borrowing to acquire the new property which you will live in so it will be a private expense.

You may not have explained the full story to your accountant.

 

You may not have explained the full story to your accountant.

Or they have no idea.

Simple rule I tell clients who pose these questions : When borrowing money using new loan, draw down etc the USE of that money determines if it is deductible, NOT the loan security used. The deduction would be claimed against the income that the (new) investment earns.

There is an exception to this rule !! This involves using offsets. Drawing savings from a offset restores the linked loan to incur more interest which is linked to the property that the loan funded. So if it is an IP a higher deduction occurs against the older property - NOT the newer property despite the $$ being used for a deposit etc.

I must do a post about a SMSF property strategy that really demonstrated advantages of a offset strategy as a way to extract equity. When clients see it they love the concept and its really clear.

IMO with all this talk of review of neg gearing tax benefits etc offsets should be considered by ALL property investors and home owners so that the notional original loan is not reduced. Those who say "but I dont have a PPOR debt" are missing the point.