Turning PPOR with no mortgage into an IP.

Hi, I know there are a few threads which may be helpful but I am wondering about turning a PPOR into an investment property. In this scenario House 1 has no mortgage. Spouse A and Spouse B want to upgrade to a new house, House 2, and want to turn House 1 into an investment property. House 1 is 100% owned by Spouse A ( was purchased before marriage). Are the following 2 options possible, or the best financial options?

Option 1: Spouse A sells 50% of House 1 to Spouse B at market rates (approximately $850 000 for 50%). As this is in NSW there is no stamp duty attached. Spouse B takes out a loan for the full 50% ($850 000). The house is now equally owned by Spouse A and Spouse B. This is then valued and turned into an investment property - can the interest against the $850 000 loan can be deducted?. Can the $850 000 can go towards House 2 or other things?

Option 2: Spouse A sells 50% of House 1 to Spouse B at market rates (approximately $850 000 for 50%). As this is in NSW there is no stamp duty attached. Spouse B takes out a loan for the full 50% ($850 000). The house is now equally owned by Spouse A and Spouse B. After a short time Spouse A sells the last 50% to Spouse B (this will cost approx $31 000 in stamp duty). Spouse B then refinances to increase his loan to a full 80% of the property, approx $1.28million). This house is then turned into an investment property and they buy House 2. The $1.28 mil is used to buy the new house. Is this legal? Can interest again be deducted against the $1.28mil loan on house 1 (which is now an investment property).

Should House 2 be bought in the sole name of Spouse A in case this strategy needs to be repeated in the future?

Are there any better options?

Thanks for your help/ideas.

 

Get an offset for the loan on house b to avoid this issue altogether.

 

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! So it looks like we could do strategy 4. Selling 50% now to Spouse B and then the last 50% to Spouse B shortly after. Am just wondering how that meets the ‘purpose’ test in order to deduct interest on the IP (that used to be PPOR).

 

Deductibility is dependant on the use to which borrowed funds are put - not the purpose

 

Thanks, but am not sure what you mean there. Are you able to explain further?

 

So if the use is a new house (House 2 as a PPOR) does that work?
Or does it need to be a new investment property or shares or something?

 

Option 1
That has a catch. The transfer must occur while it is the principal place of residence of both A + B. It should be contracted at market value and the main residence exemption MIGHT apply. Get personal tax advice as there could be a catch and the whole issues of property ownership should be considered. The spouse can use the proceeds borrowed by A to buy the new house and it could be a debt recycling exercise.

Option 2
Also possible. The CGT issues needs review and the assumption that the property is exempt as a main residence underlines both options.

Debt servicing and other issues should also be explored by a broker. Note that they might not be encouraged to act for option 1 only since option 2 would clawback any fees they earn. Whether option 1 and 2 can be done together is doubtful. OSR NSW could even apply a avoidance rule if they saw both transfers. Worth checking that legal issue first.

I have worked on a few of these deals with Terry and as a broker and tax adviser and soliictor he knows the issues well. I would want it well managed.

 

I though you were talking about your spouse borrowing to buy the existing house off you?

Best to get some tax advice

 

The purpose is to buy a share of property. If that property is now geared and then rented I see no concern.

 

Thanks so much. I will discuss with Spouse B and look at further tax/ legal advice.