Turn PPOR into investment and rent locally

Discussion in 'Loans & Mortgage Brokers' started by StevenO, 5th Jun, 2021.

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  1. StevenO

    StevenO Member

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    Looking for some advice on next steps. Current PPOR (2 bed unit SYD Eastern Suburbs) valued at $1.4 and rental forecast around $750 week. Have a LOC from State Custodians with limit of $560k against PPOR but is fully paid off. We have cash savings of $200k and approx $11k monthly as a budget.

    Originally planned to rent out our PPOR and buy a larger property locally for around $2.5. Recent significant market movements have made us rethink the purchase and we are happy to rent somewhere for 1-2 years if needed at approx $4-5k monthly. Would aim to then buy as and when more stock comes back to market.

    What is the best way to structure loans based on this situation? Increase existing LOC to close to 80% of current PPOR value and only draw down as a deposit on a new PPOR when we do eventually purchase?
     
  2. Trainee

    Trainee Well-Known Member

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    What will this achieve?
     
  3. Terry_w

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

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    Is the loc used?
    If going to rent what would you use it for?
     
  4. StevenO

    StevenO Member

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    LOC has been paid down to $0 but is still open with $560k available. Original thought was to increase this with our current lender to approx 80% value of current PPOR to allow us to use it as a deposit quickly on a new PPOR whenever we need it in the future.
     
  5. Terry_w

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

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    That might be a good idea, but once you use it consider converting it from a LOC to a term loan
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Busload of non deducible debt coming up there with no remnant loan on the old PPOR

    Any strategies to deal with that ?

    ta
    rolf
     
  7. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    Once You use the funds avaliable from the LOC you might want to restructure it to a property resi loan as the rates (I assume) would have a big difference.

    Should you top it up to 80%? Doesn't really make much of a difference since its non tax deductible.
     
  8. StevenO

    StevenO Member

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    What’s the best structure for a tax deductible investment loan when changing current PPOR to an investment and then purchase a new PPOR?
     
  9. Terry_w

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

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    A time machine?

    Next best is one of these
    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
     
  10. Baker

    Baker Well-Known Member

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    Having put all the cash in an offset account and not payed down the loan.
     
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  11. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

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    The hurdle is you may not have any tax deductible debt, while the current PPOR is paid out , if you draw out equity from that property for the use of a new PPOR, even if the existing PPoR turns into an investment, there isn't any deductible debt as the usage was always a PPOR.
     
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  12. StevenO

    StevenO Member

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    Could I increase current LOC to 80% PPOR value and withdraw it fully. Refinance to new lender with offset and then deposit withdrawn cash into the new offset account?
     
  13. Trainee

    Trainee Well-Known Member

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    Doesn't change the deductibility, which depends on how you use the proceeds of the loan.

    This is a common error, which can't be fixed easily now.
     
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  14. StevenO

    StevenO Member

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    If I had initially taken out loan on PPOR with offset, and only paid into the offset, what are the proceeds considered as?
     
  15. Trainee

    Trainee Well-Known Member

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    Get professional advice, but my amateur understanding is that then you wouldn't have repaid the loan that was used to buy the property. Say you took out 500k loan to start with to buy the property. If the loan balance has not decreased, you haven't paid any of it off.
     
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  16. StevenO

    StevenO Member

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    That is my understanding now too. Just trying to work out how that could then be used to produce a tax benefit in my case as the loan was intended for a PPOR even if it has technically not been paid back.
     
  17. Trainee

    Trainee Well-Known Member

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    When you move out, as you are planning to do now.......
     
  18. Terry_w

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

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    You could have used a large loan to acquire the current main residence, then fully offset it, so no interest would have been payable.

    Then when you buy the new property do the same thing and if you move into this move your offset cash over to the new loan so you would not be paying any interest on that.

    The first loan would still have a large balance and it would have been used to acquire the property and once that property is income producing the interest would then be deduction because it relates to the production of rent
     
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  19. StevenO

    StevenO Member

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    Makes sense but if the intended purpose original loan was not to generate income, is it simply a case of when it does start to generate income that it becomes tax deductible?

    I’ll need to delve deeper into LOC v Offset as the intended original purpose for both seem the same. Only difference is that interest was paid directly back into the LOC but this is enough to not allow it to then be used to generate income.
     
  20. Terry_w

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

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    It doesn't matter what the purpose on the loan is or was. Only the use to which the borrowed funds were put.

    If they were used to buy an asset that produces income the interest could be deductible.

    LOC and offsets are 2 totally different product types. Nothing to compare really. Like comparing apples and oranges, which are both fruits and round, but LOCs and Offsets don't even have that in common.