Regain loan deductibility after novice mistake

Discussion in 'Loans & Mortgage Brokers' started by proptalk, 17th Dec, 2020.

Join Australia's most dynamic and respected property investment community
  1. proptalk

    proptalk New Member

    Joined:
    15th Dec, 2020
    Posts:
    1
    Location:
    Australia
    After the novice mistake of thinking that deductibility is linked to secured property instead of loan purpose, is there any way to salvage the situation?

    Example:
    - Bought Property 1 to live-in with $500K loan.
    - Paid loan down to $200K.
    - Refinance back to $500K, use funds to buy Property 2 to live-in.
    - Rent out Property 1 - only $200K balance from initial purchase is now deductible? Other $300K is deemed for private purpose?

    Is there a way to salvage or reset such a situation? Can any refinance or restructure help regain deductibility of the full $500K loan on Property 1, since it is now used for rental investment?
     
  2. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,258
    Location:
    Australia
    Do you have an offset against property2?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    A straight forward NOPE.
     
  4. CK_Invest

    CK_Invest Well-Known Member

    Joined:
    4th Apr, 2016
    Posts:
    212
    Location:
    Sydney
    what would have been the better option to get 500k deductible?
     
  5. JasonC

    JasonC Well-Known Member

    Joined:
    14th Mar, 2017
    Posts:
    256
    Location:
    Sydney
    Spousal transfer? (Ie. Sell property 1 to your wife/husband who borrows to purchase it off you).

    Sell property to a trust? (Again which borrows money to purchase it)

    Sell property 1 and buy a different investment (and borrow to purchase it)?

    Debt recycle away to slowly convert your non-deductible debt into deductible debt (used for future purchased investments)?

    Regards,

    Jason
     
  6. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,258
    Location:
    Australia
    In the first place? IO with offset, probably.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    Not have ever paid it down. Offset account would have worked well.
     
    CK_Invest likes this.
  8. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    27,101
    Location:
    Sydney or NSW or Australia
    Buy place 3 & rentvest.
     
  9. CK_Invest

    CK_Invest Well-Known Member

    Joined:
    4th Apr, 2016
    Posts:
    212
    Location:
    Sydney
    What happens if the scenario changed like this:

    Example:
    - Bought Property 1 to live-in with $500K loan.
    - Paid loan down to $200K.
    - Refinance back to $500K, use funds to buy Property 2 for investment (and live with parents / rent elsewhere)

    Would the 500k be deductible on Property 1?
     
  10. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,258
    Location:
    Australia
    200k of it would be deductible against the income derived from property 1.
    300k of it would be deductible against the income derived from property 2.

    But deductability is not an issue when you only have IPs. The problem is when you need a deposit for PPOR.
     
    CK_Invest and Terry_w like this.
  11. CK_Invest

    CK_Invest Well-Known Member

    Joined:
    4th Apr, 2016
    Posts:
    212
    Location:
    Sydney
    Thanks!
     
    Terry_w likes this.
  12. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    10,599
    Location:
    Gold Coast (Australia Wide)
    Salvage yes

    Will take some time

    Active Debt recycling

    ta
    rolf
     
  13. SAlad

    SAlad Member

    Joined:
    2nd Jan, 2021
    Posts:
    23
    Location:
    Adelaide
    Hi all

    Currently own a PPOR, considering converting that into an investment property and buying a new PPOR.

    I am just sorting my finances before seriously looking.

    What happens if the scenario changed like this:

    Example:
    - Current Property 1 PPOR has value ~$520k, loan of $330k. No offset, $40k in redraw.
    - Refinance Property 1 to create new loan with offset account at 90% of $~$520k. Therefore, principle is now ~$468k.
    - Sit equity balance of ~ $138k in new Loan offset
    - when time is right, buy new PPOR using Offset balance of ~$138k
    - rent out Property 1

    Would this then make the interest on the Property 1 Loan of $468k entirely deductible?
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    nope
    it would make it worse because it would be a mixed loan too.

    the amount deductible is what was used for the purchase or improvement of the property.
     
  15. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    10,599
    Location:
    Gold Coast (Australia Wide)
    not a tax guy but I would think the tax decuctible amount is the loan balance as at today, assuming you were to convert today

    This assumes that no redraw has been taken from the loan for personal purposes.

    ta
    rolf
     
  16. SAlad

    SAlad Member

    Joined:
    2nd Jan, 2021
    Posts:
    23
    Location:
    Adelaide
    thanks for the prompt response.

    Even if at the time of potentially purchasing the new PPOR the funds are coming from an offset account (as a result of the refinancing on current loan), rather than the current redraw account?

    Edit: to make it clearer

    day 1: refinance current PPOR loan to a loan with an offset facility, releasing equity from loan/redraw into offset facility.

    Day 2: have ~$138k in offset facility. Balance of loan is now $468k

    day 35?: purchase new PPOR using funds in current offset facility.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    we don't know what the loan relates to.

    The loan needs to relate to the property. It could be a loan secured by the property with the money used to buy a giraffe.
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    see my answer above.

    What are you borrowing the extra money for? The purchase of the new main residence?

    Mixed loan results, making things worse.
     
  19. SAlad

    SAlad Member

    Joined:
    2nd Jan, 2021
    Posts:
    23
    Location:
    Adelaide
    fair enough.

    if that’s the case, I might consider selling to maximise my returns, and buy an investment after upgrading the PPOR. Will need to look at my options and crunch some numbers.

    appreciate the help.
     
    Terry_w likes this.
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    SAlad likes this.