PPOR to later IP - debt recycling not good?

A possible future is to move into an IP as PPOR, and either sell of change the PPOR into an IP. Now if the old PPOR is sold, then doing debt reduction up that point of selling is a good idea.
But if the PPOR becomes an IP, then paying off the PPOR through debt recycling isn't necessarily good because then only the remainder becomes tax deductible. An advantage seems to be that the remainder of the loan is smaller making the LVR smaller making the nett yield much better.
Are they other advantages or disadvantages?

For example, say I have a $500,000 loan on a $600,000 PPOR. I debt-recycle (say through dividend providing shares) the loan down from $500,000 to $400,000, with the $100,000 difference from a loan split/LOC now being in shares but still against the PPOR loan.
Now I change from PPOR to IP, only the interest on the $400,000 is deductible against the rental income rather than $500,000 (because that would be double dipping).
It all seems advantages to debt recycling in this case - are they any disadvantages?

If you sell, then there's a $100,000 loan against the property that, I presume, needs to be converted into an investment loan - correct?

 

Depending on how much equity and servicing you have you could still recycle debt into an offset account instead of paying down the loan.

There are no needs to 'convert' loans but if you sell then you would want to consider deductibilitiy issues going forward.

Speak to your tax advisor.

 

Thanks Terry. I don't quite understand the debt recycle through offset.

(for others, since I know you know it well) I thought the debt recycle route was:

• gain regular but not-small amounts of income (say dividends from shares) - $X per month (or quarter, or year)
• instead of just buying more shares (or whatever income re-investment), which would be have no tax advantages, you instead
  • pay $X off the PPOR non-deductible home loan into a loan split.
  • Take $Y out of the LOC or split and purchase more of the regular income producing things (widgets ). $X=$Y in pure quantity terms.

$X comes off the homeloan and the same amount (now $Y) purchases income producing shares (for example). Interest on the $Y is tax deductible.

If you're not paying down the home loan and instead putting $X into the offset, how can you keep withdrawing the $Y amounts? If you have huge capacity to borrow without paying down, why wouldn't you just borrow fully up front and have a larger share holdings and get larger dividends quicker?

 

That's one recycling debt strategy, but there are others.

Borrow to invest, put the income into the offset, not pay the loan down, and borrow some more against increased equity.

This can work well where there are 2 separate entities such as spouse A and B.

At the end they will have a larger cash amount in the offset account and this could be used to pay down the new non-deductible loan.