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Which loans to pay back when selling??

Discussion in 'Accounting & Tax' started by Valentino, 23rd Aug, 2016.

  1. Valentino

    Valentino Active Member

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    Let's say we have 3 IPs with these separate IO loans:

    Ip1
    has its own original loan
    Equity loan to purchase Ip2
    Equity loan to buy IP3.

    Ip2.
    Main loan (deposit from equity loan from Ip1).
    Equity loan used to buy a car (PI loan)
    Equity loan to buy Ip3.

    Ip3.
    Main loan


    So. We plan to sell IP1. And buy a PPOR. Which loans do we have to pay out when we sell?

    My understanding is that the loans are linked to what we bought with them, so IP1 we'd only pay back the original loan. Am I right? Or do we have to pay back the two equity loans too?? (Please say no )
     
  2. Username86

    Username86 Well-Known Member

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    The brokers on here will have more knowledge than I do but for tax is the purpose of the loan but for the banks they want the security beneath them, so if a loan is secured by an asset and you sell that asset you must find equity elsewhere or pay out the loan.
     
  3. Brady

    Brady Well-Known Member

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    Couple of questions

    What are the values of the properties and what are the loan amounts?
    - Potentially if the IPs have increased in value you could increase the main loans to payout the equity loans.

    Are you purchasing your PPOR on the same day or prior?
    - Could potentially look at security substitution, keeping the existing loans.

    You dont really want to be paying off deductable debt to have higher PPOR non-deductable debt

    Vehicle loan would likely go, unless you're claiming a tax deduction on this property
     
    Perthguy likes this.
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Repay any loan that relates to the property that is sold. But if the property is sold at a loss then you should seek tax advice about keeping the loan open.

    In any event get tax advice and which out for mixed loan issues.
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Which lender are you with?

    You may be able to keep the IP loans open, and secure them with cash until you find a new PPOR to secure them against.
     
  6. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Which lenders allow such wizadry?
     
  7. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    When you sell a property, the lender expects you to pay off the loans secured by that property. If you're selling the PPOR, you'll be expected to pay off and close the PPOR loan and the two equity loans.

    If there is enough equity in the IPs, you could do a security substitution for the various equity loans secured by the PPOR. This would maintain the maximum tax deductability of the equity loans rather than paying them off. It'll also give you access to more cash for your next project.

    If there's not enough equity in the IPs at this point to do a straight up security substitution, then a refinance/restructure of the IP loans might go a long way to helping. It may not get the perfect outcome, but probably better than just paying off the loans against the PPOR.
     
    Perthguy likes this.
  8. Valentino

    Valentino Active Member

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    Thanks everyone. Ok it looks like this...we do not live in a PPOR, we rent. but IP1 is CGT free as exPPOR.

    Ip1 - value approx $500k
    Loans
    265k original loan
    40- Equity loan to purchase Ip2
    50- Equity loan to buy IP3.
    = 355k loans
    = 145,000 not including selling costs

    Ip2. - value approx 550k
    300k - Main loan (deposit from equity loan from Ip1).
    30k - Equity loan used to buy a car (PI loan)
    50k- Equity loan to buy Ip3.
    = 380k loans
    = 170k - (CGT +selling costs)

    Ip3. 450k approx value
    350k loan
    = 100k -(CGT+ costs)
     
  9. Brady

    Brady Well-Known Member

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    Not accountant not advice first up....

    Selling IP $500k say less ~$15k sale costs = $485k
    Payout $265k original loan
    Payout $30k equity loan vehicle (if not tax deductable)
    Increase IP2 main loan $300k up to $340k (paying out $40k equity loan against IP1)
    Increase $50k equity loan to $100k (paying out $50k equity loan against IP1)
    Leave IP #3

    End result
    IP #2
    $340k main loan
    $100k equity loan for IP3
    LVR 80%

    And $190k proceeds of sale for next purchase :) instead of lower amount. This way keeping more tax deductable debt
     
    Valentino likes this.
  10. Valentino

    Valentino Active Member

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    Thanks Brady, very decent of you to put your mind to problem solving this conundrum. ..fun too though, isn't it, like working out a puzzle.
     
    Brady likes this.
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Before selling refinance the equity loans attached to the former PPOR by incorpating these into the relevant loans secured by the IPs.

    Then just sell and pay out the debt of the former PPOR
     
  12. Valentino

    Valentino Active Member

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    On a diff tI thought a PPOR had to have a PI loan, not an IO loan. Why would one do IO for PPOR , esp when interest rates are low. Wouldn't it be better to knock off interest while rates are low?
    Adelaide bank
     
  13. Brady

    Brady Well-Known Member

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    Pending future plans of that PPOR, if it was to turn into an IP later on it would have been better to save the principal repayment in an offset (still reduces the interest the same as paying of the debt) which allows for future use - like buying the next PPOR.