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Refinancing before making existing PPOR an investment property

Discussion in 'Accounting & Tax' started by Hoops1, 14th Sep, 2016.

  1. Hoops1

    Hoops1 New Member

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    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.
     
  2. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    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/
     
  3. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    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.
     
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  4. Weaver

    Weaver Well-Known Member

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    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
     
  5. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    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.
     
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  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    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.
     
  7. Weaver

    Weaver Well-Known Member

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    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
     
  8. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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  9. samfinn

    samfinn Member

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    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
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    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?
     
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  11. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    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.
     
    Ross Forrester likes this.
  12. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    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.
     
  13. samfinn

    samfinn Member

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

    Terry_w Tax and Structuring Lawyer Business Member

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    For what sort of advice?
     
  15. samfinn

    samfinn Member

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    reaffirmation of my loan structure correctly done
     
  16. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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