Tax Structuring PPOR and IP

Scenario below for discussion:

John owns a property with 50K loan remaining and is currently PPOR. (Valuation 1.2M)
John buys Investment Property for $1M on interest only loan (Valuation 1M)
John also owns another IP on interest only loan with loan value of 500K

John wants to move from the PPOR which has 50K loan to IP with $1M of loan as he likes the location more.

John is not sure if he will be able to deduct the interest on money borrowed for income producing activities for second property of $1M considering if he moves in he will not be able to generate the income from that property though he can generate the same income from the property where he is currently living.

His concern is losing the tax deduction on $1M debt, if you think of ATO definition around purpose of the loan which was to buy income producing asset. His purpose remains the same to generate income though he is swapping the income producing asset from one to the other as he finds it convenient to live in his investment property more.

John is not willing to sell any of the properties and he is seeking clarification on tax structuring only.

 

purpose is irrelevant. look at use of funds. John borrowed to acquire a property. If he is living in it the use of funds is private and interest not deductible.

 

Thanks Terry though John has lot of equity in PPOR and potentially he can just get a bigger line of credit from the bank which secures against all three properties and still continues to earn the same income considering both PPOR and IP 1 are same in value and rental. Is there any other way around structuring this for tax purposes considering his intent to borrow was to buy the IP and now he is just converting his PPOR to IP

 

One could also argue this in unmixing of the loans as he is cross securitised all his properties to borrow

 

The USE of the borrowed funds is the key issue. You can borrow to your hearts content against any property and it wont affect the deductions. The only interest deduction allowed is when:

1. The use of the borrowed $$$ was the buy the property in the first place and
2. The property also produced rental income.

Borrowing after acquisition wont increase deductions on the property being used as loan security. If you borrow more $$$ the test is what you then do with the newly borrowed money.

 

You could argue anything but what is the point?

 

Not sure what you are trying to do but this thread may be of interest:

Strategy: 11 Strategies for when you move out of the PPOR and keep it Strategy: 11 Strategies for when you move out of the PPOR and keep it

 

Thanks Terry and Rolf.

Only way forward for John could be selling his share of 50% to his spouse for which spouse takes a bank loan to pay John. John puts that full amount in the investment property loan he is moving into to reduce the debt of $1M owing on the property.

Can you clarify will there be a stamp duty payment considering legislation has been changed from 1 July 2017 for PPOR as well. Stamp duty exemption only applies where transfer between spouse is without any consideration though if bank provides loan to John's spouse there is consideration involved and John will need to pay stamp duty.

Second question will stamp duty incur on the total value of the property or the 50% share being transferred i.e. on a $1M property stamp duty to be paid for 500K only.

 

John would have at least 11 options to choose from.

Stamp duty would be payable on the value of the property transferred - $500k in this case.
Sounds like John must be in VIC.