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Turning IP into PPOR

Discussion in 'Accounting & Tax' started by daz4130, 30th May, 2016.

  1. daz4130

    daz4130 New Member

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    Hi all,

    I purchased my PPOR 9 years ago.

    5 years later I bought an IP for $700k

    The intention with the IP was to move into it sometime in the future to be closer to my disabled mother when her health declines.

    The time is nearing so to put it simply I cross collateralised both my PPOR and IP to borrow $700k to buy the IP, this was interest only therefore the balance is still $700k. Now by turning my PPOR into an IP will the interest on the $700k still be tax deductible? As with any other expenses incurred whilst renting out my previous PPOR?

    I'm aware of the 6 year rule for CGT.

    Thanks,
    Darren.
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If the $700k relates 100% to the purchase of the IP, and you go live in the IP, no interest will be deductible.

    If there was a loan taken for the purchase of the PPOR-turning-IP, the interest on that will be deductible.
     
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    You borrowed the $700k for the purposes of purchasing an IP. Now that IP is going to become your home which is not a deductible purpose, so the $700k would no longer be deductible either.

    The cross collateralisation nor the CGT 6 year rule doesn't affect the purpose for which the money was borrowed. Whilst it's an IP, everything associated with it is deductible. When it's a PPOR, it's not deductible.
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No. This will be a private expense once you move in.

    Expenses such as rates and insurance will be deductible against the old PPOR when it is rented out.
     
  5. daz4130

    daz4130 New Member

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    Thanks for the replies.

    Is it possible to go and borrow 700k against my current PPOR to pay out the IP-turning-PPOR? Or is there a way to re-purpose the loan?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, but that won't change deductibility.

    Since you have already acquired the main residence you cannot do much other than sell it - could be to a related party who would borrow to buy it.

    Look at my tax and legal tips for a few ideas.
     
  7. daz4130

    daz4130 New Member

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    Sounds more viable to just move in with my mother and rent both the properties out so I maintain my deductibility on the IP and get positive cash flow on my PPOR.

    The ato are scum, I should just be able to repurpose the borrowed funds.
     
  8. Rob G

    Rob G Well-Known Member

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    You have repurposed the borrowed funds.

    That is the problem.
     
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  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The ATO don't make the laws, they just administer them.

    And what you propose makes no logical sense.
     
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Tax law defines that a deduction is only available for an expense incurred in earning assessable income. If you used the $700K to buy a property and it doesnt produce income (if you live in it) you have no entitlement to claim a deduction. Its like arguing a policeman is responsible for your driving fine if you speed. They just detect and issue the penalty .

    The 6 year absence rule is not relevant. If you move into the former IP the 6 year rule doesnt apply since it has a condition that you cannot reside in a property you (or spouse) own. What will happen is the former PPOR would commence being subject to CGT while the former IP (now home) will commence being exempt. If and when you sell any of them a pro-rata calc would be required.
     
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