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Turning PPOR into IP - Negative gearing?

Discussion in 'Accounting & Tax' started by twistedstats, 29th Nov, 2015.

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  1. twistedstats

    twistedstats Well-Known Member

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    I am thinking of upgrading and turning my current PPOR into an IP. I have a no-frills home loan with no offset account and it is almost all paid off. Now if I decide to purchase a different PPOR, I am wondering if it is possible for tax purposes to have all my equity in the new PPOR and negative gear my current PPOR (which will be the IP)?
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    That's not an ideal situation, tax wise :(

    What will happen is, the IP (ex PPOR) will have no (tax deductible) debt and the PPOR will have quite a lot of non deductible debt (i assume, unless you've got heaps to contribute to it?).

    Might be better to sell to upgrade, then use the proceeds to buy an IP elsewhere.
     
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  3. herenow

    herenow Well-Known Member

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    There is a wealth of knowledge on this forum in Terry's tax tips. I think it would be well worth your time to have a read through.
     
  4. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    For other who may read this, this is why it almost always makes sense to put all your surplus funds into offset rather than pay down your PPOR loan down even if you don't even expect it will become an investment.

    Because your financial position will be the same but if it does become investment, you will be able to take cash out of offset and all interest will be deductible.

    @twistedstats, from here, your best move may be to top up/refinance your PPOR loan and use those funds towards the purchase of your PPOR. But talk to a broker and tax accountant for specific input on your situation :)
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You won't be able to unfortunately. You'll end up with next to nothing in deductible debt and a large non-deductible PPOR debt.

    As DT said, from a deduction perspective you'll be best off selling and using the funds to buy an IP with minimum deposit and putting the rest toward a PPOR.
     
  6. twistedstats

    twistedstats Well-Known Member

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    Unfortunately I've only got enough funds to cover one property resulting in the worst possible outcome for tax purposes. I was hoping I could refinance the current PPOR somehow to turn it into deductible debt.

    When I purchased the house I was enticed by the lower interest rate no frills loan which did not come with an offset account not knowing that few years down the track it will end up being a very big mistake.
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You'll be in a good position to do some debt recycling if you decide to keep your current property and not sell up. Might as well make the best of a bad situation.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There are a few things which can be done - see my tax and legal tips.

    One thing is if the property is currently owned in one name you can sell half to the spouse without stamp duty (if property is in NSW). The other spouse could borrow to buy you out with the proceeds used to pay down the new loan. A higher amount will be deductible on the first property.

    You can also consider an outright sale to the other spouse but duty would apply.

    Worth also considering a sale to a company which you control.

    In many cases it may be better to sell outright on the open market.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    ps. structure the new purchase so you can avoid these problems. e.g.
    104% loan
    1 owner
    IO loan
    offset account
     
  10. Jamie_

    Jamie_ Well-Known Member

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    That's the structure you'd recommend for the average person buying a PPOR?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It would depend on the situation, but it is one way to do it which would maximise future deductions.
     
  12. twistedstats

    twistedstats Well-Known Member

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    Do you mean re-draw on the current property and use it to buy another asset (shares/property) assuming I can find something that actually returns more than the current mortgage rate?

    Thanks Terry for your input in the forum. This is exactly what I would ask for in a new IP. I actually asked for 110% (stamp duty + some money for basic renovations). To do this, I would need to provide my current property (assume fully paid off) as collateral. Just wondering, would I need to pay LMI in this case for the new IP?
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Best not to give your existing property as security, but to set up a separate loan on your PPOR and to use this. Cross collateralising security can be avoided as can LMI.
     
  14. twistedstats

    twistedstats Well-Known Member

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    Good point. Thanks.
     
  15. newbie property

    newbie property Active Member

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    @twistedstats I am in the same situation, it's like a penalty for paying down to your own PPOR (from a tax point of view when you want to turn it into an IP)....
    anyway I paid down my PPOR in a no-frill loan (almost paid off), and I'm buying an IP now, I don't have extra money for the deposit of the IP, only the redraw amount in my current PPOR to show that I have enough equity. however the lender wants to use my current PPOR as security. I took Terry's advice of trying to avoid cross collateral..... I didn't use a broker, just talked to the bank, but the bank still refused to split the PPOR loan (one for PPOR and one for IP), they told me to do so I'll have to pay LMI, as the money in the redraw is not a sufficient proof for the IP (though the actual funds is enough to pay more than one deposit of IP)...I don't know if I just got bluffed by the bank or is it a serviceability thing, it seems the only way is use my current PPOR as a security...and i don't have time to get a broker...

    I'm just curious whether you've worked out the situation with your lender? no cross collateralising?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    you got 'bluffed' - I would say stitched up - by the bank. It can't be serviceability as if you won't qualify with no crossing then you also won't with crossing.
     
  17. newbie property

    newbie property Active Member

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    @Terry_w I thought so too...maybe it's better to get a broker next time...but this time it's just too late...
     
  18. Digitalism

    Digitalism Active Member

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    So you have proceeded to cross collat your loans?
     
  19. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    You should discuss this directly with a good broker, this forum has quite a few.

    The initial problem is you've approached your lending with the first property in such a way that now you're going to miss out on significant tax deductions. With better original advice this might have worked out very differently. Now the banks are trying to stitch you up via cross collateralising when it can easily be avoided. Here's a list of reasons not to cross colateralise:
    Cross collateralisation - 10 reasons to avoid

    Trying to approach the banks directly isn't doing you any favours. Please get assistance from a good broker who knows what they're doing.
     
  20. twistedstats

    twistedstats Well-Known Member

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    Sorry, I haven't spoken in depth to my bank yet but my situation is not as bad as I also managed to get a separate line of credit (which I was going to use on a reno) so I could always draw on that for any new IP deposit. I just can't turn my PPOR into an IP.

    At worst, could you just switch lenders and get the loans split?

    Precisely. To be fair, back in 2012 when I purchased the property I planned on living there for a long time and doing a extensive renovation. I had no idea my income would unexpectedly rise and I would "ever" actually be in a position to purchase another IP..... and I had kids too (so require a different PPOR). So naturally, I tried to save a few $$$ with a no-frills loan.

    Lesson learnt for myself and hopefully others on the forum.