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Refinance or Start over to reduce non-deductible debt

Discussion in 'Accounting & Tax' started by drg86, 18th May, 2016.

  1. drg86

    drg86 Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    279
    Location:
    Newcastle
    Hi all,

    I want to start looking at what is best for the following situation. The goal is to get to the ideal situation of having having the PPOR paid off and all the debt on the IP's. Currently it is almost the opposite :(

    Currently:
    IP 1
    Value 280k
    Loan 85k

    IP 2
    Value 550k
    Loan 285k

    IP 3
    Value 300k
    Loan 190k

    PPOR
    Value 400k
    Loan 380k

    So as you can see not the best from a tax point of view.

    Option 1: Now I don't know if it is possible as I've only just started looking into it but can a refinance of the whole portfolio change the amounts owing on each property leaving me with a paid off PPOR and more IP debt?

    Option 2: Sell everything, buy a PPOR outright for around 500k. Use equity for deposits on some IP's

    Option 3: Something else? Debt recycling etc?

    All the IP's are ex PPOR's. Over the years I've learnt more and structured it better but it was the first couple that have put me where I'm at. Big cash deposits on first 2 plus reno cash.

    Moving forward I am looking at selling IP 1 as it has no CG and can't do much with it, with what I know now the money can be better spent. Also looking to sell PPOR after the reno is complete.

    Thanks in advance :)
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
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    Location:
    Sydney
    So you didnt borrow on the PPOR and use any of the $ to buy / finance any IP costs ?? Something looks wrong....OK I see ur comment re ex PPOR. You didnt use a offset back then I assume.

    One strategy could involve selling IPs to a trust etc to increase loans on IPs BUT.. In NSW thats subject to duty and land tax can be onerous. Other options which still incurs duty but not land tax could involve a fixed unit trust. The fixed trust strategy isnt easy BUT it might be possible. It does come with a small CGT issue as a compromise.

    You are left with low loans....Why not equity release from IP1 / 2 and use the $ to buy IP 4 etc.

    Option 1 = No !!!
    Option 2 = Not smart. Trigger CGT and incurring selling costs. No future growth if all sold.
     
    Last edited: 18th May, 2016
  3. BennEznElle

    BennEznElle Well-Known Member

    Joined:
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    Posts:
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    Location:
    Adelaide
    Option 1, you can do, but its not going to change the fact that $380k of loans is still going to be non deductible. The only benefit I can see of doing this is if things go pear shaped your PPOR is unencumbered.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Do you have a spouse? Which states are the properties in?
     
  5. drg86

    drg86 Well-Known Member

    Joined:
    25th Jun, 2015
    Posts:
    279
    Location:
    Newcastle
    So a bit more clarification.

    IP 1 was my first PPOR. 50% deposit plus costs in my own cash. P&I with offset.

    Wasn't investment minded and was just a place to live in my town. Saved and got to point of offset covering loan and paying no interest, so principle payed down a fair bit at that stage.

    IP 2 was next PPOR. Cash 20% deposit plus costs (from the offset). IO fixed 3 years which expires Sep 2016 hence looking at what to do over next few months. 35k cash reno, big equity gain.

    IP 3 was my partners PPOR. Cash 20% deposit and costs. P&I with offset. Small cosmetic reno.

    PPOR/IP4 is the current place we are renovating/living in. Borrowed 105% using 20% and costs equity from IP 2. (purchased 350k)

    All in NSW
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    14th Jun, 2015
    Posts:
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    Location:
    Gold Coast
    a debt recycling strategy may help if you are on middle to high tax rates.

    ta
    rolf
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Location:
    Sydney
    You could possibly move back into IP 1 and your spouse could borrow to buy 50% from you and transfer could occur without stamp duty or CGT.

    Combine this with some debt recycling and you will speed things up.

    Seek legal and tax advice.
     
    Paul@PFI likes this.
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
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    Location:
    Sydney
    Except if IP1 was owned and 6 year rule used ... IP2 poses a problem for the 6 year rule on IP1. And possibly IP3 may too depending on dates and choices made for CGT.....

    Yes definitely seek tax advice and legal advice to follow.