Refinancing before making existing PPOR an investment property

Hi All,

I currently own and live in a starter house that I always intended to one day make an investment property when I "upgrade" to another house. I have quite a bit of equity in it now that I would like to use as a deposit for the new PPOR.

If I refinance my current house immediately before I intend to do this, and thereby access a sizeable chunk of the existing equity in cash (and simultaneously increasing the loan amount of course), I can then use that extra cash to use as a deposit for the new house, right?

If I then I make my old house the investment, would the interest payments on the entire larger loan (for the old house) be tax deductible? I have heard some people say that only the loan amount before I refinanced would be tax deductible, others say it wouldn't.

 

You can do that but it won't increase the amount of interest you can claim.

Only the loan amount associated with the purchase of the property would be deductible (which may be different to the current balance outstanding).

see
Tax Tip 77: Redrawing Extra Repayments to Increase Deductions? https://propertychat.com.au/communi...extra-repayments-to-increase-deductions.5760/

and

Tax Tip 87: Moving out of the Main Residence and Interest https://propertychat.com.au/communi...-out-of-the-main-residence-and-interest.6368/

 

Yes, no issues using equity in this property for a deposit + costs on another property.

No it wont be tax deductable as its the "purpose of funds" that determine tax deductability.

What you should have originally done was set up an IO loan with a linked offset and made interest payments and stored the principal + savings in an offset account. This will preserve the principal loan amount maximising the tax deductions when you convert to an IP.

You can then use the funds in the offset for a deposit on the new PPOR, rinse and repeat.

You could still gear up on the original property and use the funds for investment purposes to regain 100% deductability. The con is the rent you receive on the new property will be taxed at whatever your current bracket is minus any costs involved except interest as loan was paid out.

 

On a slight slant from this, if I took a split loan using IP1 as security (accessing equity), to purchase IP2, then the interest for this loan is tax deductible because I purchased another IP, not because the securing property was already an IP?

Thus if I took a split loan against an IP, and used it to buy a PPOR then that interest isn't tax deductible?

thanks Weaver

 

Correct

Correct

Three important words to consider are "purpose of funds" and the answer to this will determine deductability or not. The security is irrelevant its what you use the funds for that matters.

 

Make sure you split the new equity loan into a new, separate loan. This will make it much easier to keep track of what's deductible and what isn't.

 

light bulb moment! - that's why some people use a strategy of going IO for PPOR, and that the common recommendation on PC is to use an offset account against PPOR to 'future proof' for this scenario described by @Hoops1 thanks

 

You are on to it

 

Situation
I have purchased first property set up an IO loan with a linked offset and made interest payments and stored the principal + savings in an offset account.My future plan is to refinance the loan and get cash and offset saving to buy my new off the plan house and land package which will be my PPOR.


In my scenario what would be the best way to maximize tax benefit?? When should i start thinking about asset protection structure scenario?

Thanks

Sam

 

That structure sounds good. Chat to your accountant/lawyer re structure- if you don't have one @Ross Forrester may be able to help with this?

 

Just make sure the equity is placed in a seperate account to keep your IP loan "clean".

Chat to the accountant Jess mentioned in regards tax planning and asset protection.

 

Asset protection should be considered at all stages and is legal advice. Speak to your account rant about the tax side such as avoiding creativing a mixed purpose loan and issues associated with borrowing to park in an offset account.

 

Thanks everyone for your advice.
Could you please give a reference for accountant/lawyer around Melbourne area at least couple of them??

 

For what sort of advice?

 

reaffirmation of my loan structure correctly done

 

I think @Greyghost of the forum is a melbourne based accountant who could probably assist