Turning PPOR into an IP - Tax deductibility of loan

Discussion in 'Accounting & Tax' started by Cash Flows, 31st Jan, 2017.

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  1. Cash Flows

    Cash Flows Member

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    Hi all,

    I am looking to turn my PPOR into an IP and have a query RE the tax destructibility of the loan.

    Current value - $375k
    Loan - $236k
    Fixed loan - Nov 2018

    Question - Can I wait until next year and refinance the loan up to 80% ($300,000) and make this amount the tax deductible amount available if/when I turn it into an IP in the future?

    Your feedback is greatly appreciated.

    Cheers

    Cash Flows
     
  2. Propertunity

    Propertunity Well-Known Member

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    NO. You get to claim the interest on $236K only (if all you bought with it is the house).

    You could claim the interest on $300K if you spent all the extra $64K on renos to the house.
     
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  3. Terry_w

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

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    No
     
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  4. Cash Flows

    Cash Flows Member

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    Thanks for your prompt reply.

    Just confirming, I would be refinancing with another lender whilst it is still my PPOR.. How do the ATO view this if my new PPOR loan balance is 300k?

    Cheers
    Cash Flows
     
  5. Marg4000

    Marg4000 Well-Known Member

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    Makes no difference.
    Only interest on the original outstanding loan amount deductible (otherwise everyone would do it!!)
    Marg
     
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  6. Propertunity

    Propertunity Well-Known Member

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    That's a common problem with turning a PPOR into an IP if you have been paying down the loan. Only the interest on the remaining loan becomes tax deductible. You can't just reload it up with tax deductible debt again if the extra debt is for personal use - like another PPOR.
     
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  7. Ross Forrester

    Ross Forrester Well-Known Member

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    If the loan to acquire an income producing asset is $236k then you can claim interest deductions that you incur on the $236k loan.

    Simply because you borrow another amount of money for a personal use does not impact on the tax deductibility of the original loan.

    With hindsight you would have structured through an offset account. This would have allowed you to withdraw the cash from the offset and retain the original loan at its full amount with higher level tax deductions.
     
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  8. Terry_w

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

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  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Correct answer is......

    1. The $236K loan would be deductible against the rental income for the former home when it becomes a IP
    2. The new loan of $64K must be used for a deductible purpose (ie deposit on a new IP) and when that new property (shares or whatever) produces income etc then yes it may well be deductible against the new income

    Loan are deductible based on the USE of the proceeds, not on what the loan security is. Its one of the important reasons to ensure that the $300K loan is not one loan amount but is two split loans - One $263K and other $64K.
     
  10. Terry_w

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

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    But we don't really know this based on the information given. This may be the case if the loan was used to purchase the property and there have been no redraws. But this may not be the case - it could have been set up as a LOC with money in and out weekly for example, and if that was the case perhaps no interest would be deductible.