Use investment funds for PPOR?

Discussion in 'Investment Strategy' started by Alemilyx, 19th Nov, 2017.

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  1. Alemilyx

    Alemilyx Active Member

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    I have rented at my current location in a very nice house at a cheap rate, as it is a mining town and a very depressed oversupplied market, so never considered buying.

    However in the new year, I am moving to the bundaberg coast (for at least 1 year, and potentially longer) and see potential in this market for keeping a property as a rental after I finish at this job.

    Currently I have 2 properties rented out on North and South side of Brisbane which are cash flow neutral/positive with my current offset balances.
    304k loan, 39k in offset (equity release in last refinance), value approx 380k.
    457k loan, 99k in offset (personal savings built over 18 months), value approx 490k.

    The property range I am looking at buying is in the 280k range.
    My question is: Can I use the 39k of funds from my equity release to purchase a property that I will initially live in as my PPOR for 1-2 years, with the future intention of renting it out, or would I be muddying the waters around the loan purpose of that equity?

    Also, would I be able to move my 99k offset savings sitting in my investment property over to an offset on my PPOR to reduce my payments, but maximise negative gearing on my investments during this time?
     
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  2. Terry_w

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

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    Yes you can but since the $39k was borrowed last year against another property possibly by increasing another loan there are about 4 tax issues to consider.

    Seek tax advice
     
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  3. Alemilyx

    Alemilyx Active Member

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    Hi Terry,
    Thanks for your response. This is what I was concerned about. To clarify, the loans are structured as follows:
    Loan A is $204k being the original loan on property 1, which was refinanced but not extended.
    Loan B is for 100k which released equity on property 1 to supply deposit for property 2 and left 39k in offset.
    Loan C is for 457k loan with 99k in offset (personal savings built over 18 months).
    Not sure if that makes any difference. I will be seeking further tax advice.
     
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  4. Terry_w

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

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    Seek advice on
    Is the interest on loan B deductible at all.
    Whether you should pay the $39k borrowed money back into the loan as is or to split the loan first.
    Then reborrowing the $39k
    You should be able to use the cabin the offset on loan c.
     
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  5. Alemilyx

    Alemilyx Active Member

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    So I have an appointment booked for next week to discuss with a property tax specialist. Took a while to figure out who/what I was even looking for, but from what I've gathered so far, if I use the $39k to help purchase a PPOR, this amount would no longer be tax deductible as it's 'purpose' will not be for an income producing asset (instead being for the home I'd be living in). This would also make Loan B 'mixed purpose' meaning a need to apportion 'tax deductible interest on the 61k' and 'non-tax deductible interest on the 39k'.

    Given I do have genuine independent personal savings in my other offset account, it seems to makes sense to put down the deposit for my PPOR using these funds, however this would mean less 'personal funds' on hand.

    I think the questions I will be asking is:
    1. If I start to use the 39k of funds in the offset to pay for the two investment properties outgoings, does this money retain it's tax deductibility? (Ie, insurance, rates, water bills, repairs, incidentals etc); if all charges are paid directly from that specific offset account? Are there any other implications given that this strategy would also mean additional negative gearing effects would be realised as this funding base reduces?
    Is there any ruling or law around how the ATO views this or is it untested?

    2. Can I then direct all personal income and investment property income into my PPOR offset account, building up my 'personal funds again' and reducing the interest owing on the property I will be living in?

    3. If I did decide to go ahead with using the 39k of offset funds and losing the tax deductibility while it is my principal place of residence, would the tax deductibility be 'restored' should it turn into an investment property again after a year or two? Can the purpose of the loan be changed back when appropriate?

    Do these questions sound reasonable?
    Should I be asking anything else?
     
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  6. Terry_w

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

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    Yes sound like reasonable questions.

    Ask about capitalising interest
    And at the end ask could Part IVA apply to allow the Ato to deny a deduction for what would otherwise be deductible.
     
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  7. Alemilyx

    Alemilyx Active Member

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    Hi Terry,

    Thanks for that. I didn't have much understanding about capitalising interest and Part IVA, but after you suggested it and reading into it, including the ATO document on Part IVA (which I must say was one of the least complex I have read); I am starting to feel a bit more concerned about such an interpretation might apply to this situation. The only exception appears to be genuine 'cash flow', however what the ATO interprets as 'cashflow' could be anyone's guess. I'm also assuming you can't get a private ruling on a hypothetical situation / and what is the turnaround for a private ruling?

    However, i'm thinking there might still be benefit in me using the 39k for part of the deposit. Doing this would mean that I would have to apportion the deductible and non-deductible interest and not claim deductions on the interest allocated to the 39k for the period of time I am living in the property, however this should be easy enough to apportion as the loan is I/O for the next four years. It also allows me to retain a majority of my personal savings in the other account.

    When I move out and the purpose of the property does change to an investment down the track, to my thinking, that 39k which funded the deposit would then become deductible again, as it's purpose is to fund an income producing asset?

    I would be losing out on about $35 dollars per week in non-deductible interest, while living in the property, but this seems a fair price to pay and means I shouldn't risk falling foul of PART IVA for what would be no more than 700 dollars of deduction at the end of it all, if I was to instead go down the path of 'capitalising interest'.

    Does this sound right? I wan't to appear half-cognizant when i speak to them!!!
     
  8. Terry_w

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

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    Yes any loan used to acquire the property could later be deductible once it is available for rent. I don't see Part IVA being applied to this, but possibly any capitalising of interest. Also when borrowing to pay costs associated with a property the ATO has indicated that they would like to apply Part IVA to these costs, but they would otherwise be deductible under s801 ITAA97 and I haven't heard of any attempts by the ATO to deny this.