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Removing nondeductible PPOR debt by IP revals?

Discussion in 'Property Finance' started by mcarthur, 26th Jul, 2016.

  1. mcarthur

    mcarthur Well-Known Member

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    Is it possible/sensible to remove all non-deductible PPOR by
    1) purchase IP;
    2) reval IP over time and place funds into PPOR offset;
    3) paydown PPOR loan with offset;
    4) make new borrowing as LOC with the paydown money;
    5) use LOC to purchase new IP;
    6) Repeat.

    The money paid into the loan from the offset at 3 "comes out again" as deductible debt in 5.
    After a few of these, then the original PPOR loan is essentially made up from LOCs/loans against IPs, and thus deductible (I'm not happy with that statement, but can't work out how to reword it propertly...).

    I'm sure something's wrong in this, but where...
     
  2. chylld

    chylld Well-Known Member

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    Basic debt recycling afaik. The LOCs could still be against the PPOR, it's the purpose that determines deductability not the security
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No it is not possible.
    You are borrowing to pay into an offset, therefore the interest cannot be deductible.

    Take a look at debt recycling instead.
     
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  4. chylld

    chylld Well-Known Member

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    I read his description as paying down the PPOR loan via the offset, but making a new borrowing (step 4) for investment purposes... isn't this effectively debt recycling?
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I read it as he was increasing the investment loans and putting the extra funds into the offset - which would not make it deductible.
     
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  6. chylld

    chylld Well-Known Member

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    I must have glossed over step 2. May as well just invest straight from IP equity releases.

    The new LOC on the PPOR would be deductible if used for investing, however the equity release on the IP (step 2) would not be deductible as its purpose was to pay down the PPOR loan.
     
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  7. mcarthur

    mcarthur Well-Known Member

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    Thanks both of you - now I'm not sure what I'm talking about :rolleyes: !

    Let's say the setup is:
    PPOR - $500,000 loan (say valuation is $800k)
    Offset - $100,000 cash

    Actions:
    0. Split PPOR loan into $400,000 loan and $100,000 loan.

    1. Pay $99,999 off PPOR loan (the $100,000 split), PPOR debt is reduced by near $100,000.
    {question: can the LOC act as a PPOR loan offset while looking for the IP?}

    2. Use $100,000 in split to purchase IP#1.

    3. time flies :D

    4. IP now has $100,000 releasable equity, and bank is happy to release it. Ask bank to release equity for the purpose of future IP (ie. increase loan for IP1) and put it into an offset against IP loan until needed. Take out of offset and go to 0.

    alternate 4. Refinance IP to new bank who value it $100,000 more, payout old bank loan on IP and put rest of new loan - $100,000 - in new bank's IP loan offset. Take out of offset and go to 0.
     
  8. chylld

    chylld Well-Known Member

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    Steps 0-2 could be simplified as "use offset 100k to pay down PPOR loan, then redraw in a new loan/LOC". This 100k loan would be deductible if it was used to purchase IP#1.

    Your step 4 has an issue where you are adding a second purpose to the IP loan. The offset cash (from the IP equity release) looks separate to you, but to the ATO they only see 1 loan (the IP loan). Simpler to take the IP equity release as either a 100k LOC, or a new 100k loan with 100k cash in an offset account attached to it.
     
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  9. eskander

    eskander Well-Known Member

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    Why wouldn't you just increase your PPOR loan to 80%, and use a LOC to purchase IP1, keeping cash in PPOR offset?
     
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  10. mcarthur

    mcarthur Well-Known Member

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    Got you. I understand and agree.
    So the idea - with your changes - makes sense as a way to continue to reduce non-deductible debt while increasing deductible debt associated with investments?
     
  11. mcarthur

    mcarthur Well-Known Member

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    Good idea, but I was assuming that would mean you aren't decreasing deductible debt - it actually stays the same (I think): say the PPOR loan increases to 80% which, say, is $100,000. So the PPOR loan has increased by $100,000, but that money goes into a LOC and into the IP. But the original PPOR loan hasn't decreased at all - there's no change to non-deductible debt.

    So I think what you've suggested is good if you have equity in the PPOR, and you don't want to reduce non-deductible debt.

    Originally, I was assuming the PPOR was already at max (let's say 80% LVR) and the only funds available was the $100k offset.
     
  12. chylld

    chylld Well-Known Member

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    Yes, this is called debt recycling. For more info see Terry's Tax Tip 2: Debt Recycling

    Whether you use $100k cash to pay down the $500k loan to $400k and redraw a $100k LOC, or do a PPOR equity release leaving the $500k loan + $100k offset cash untouched, your effective PPOR non-deductible debt is still $400k.
     
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  13. eskander

    eskander Well-Known Member

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    You mentioned a PPOR value of 800k with a loan of 500k which means approx 140k of usable equity.
     
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  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The interest on the $100,000 equity release would not be deductible. You are borrowing for private purposes.
     
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  15. mcarthur

    mcarthur Well-Known Member

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    Ah, I get that. So that interest become non-deductible, but the interest for the next IP would be deductible. So actually there is no net gain in reducing nondeductible debt. Pooh.
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Actually the interest for the next IP using that money would probably not be deductible.
     
  17. chylld

    chylld Well-Known Member

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    From step 4? Is it because a single loan was used and is now mixed-purpose for IP and IP2? I thought it would still be fully deductible provided all purposes are income-producing
     
  18. eskander

    eskander Well-Known Member

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    I think placing money from the 100k equity release in an offset, regardless of what it's offsetting, is not an investment purpose so therefore not deductible. Correct me if I'm wrong @Terry_w
     
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  19. chylld

    chylld Well-Known Member

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    Oh yeah if it's an existing, mixed purpose offset account then the new borrowing would become contaminated.

    Might be ok if it's a new offset though?
    Tax Tip 1: Parking borrowed money in an offset account

    A much cleaner way to do it is with a LOC. Then convert the LOC to SVR once the investment has been made (if so desired)
     
    Last edited: 27th Jul, 2016
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