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why is this investment loan not tax deductible?

Discussion in 'Property Finance' started by Green Grass, 29th Jul, 2015.

  1. Green Grass

    Green Grass Member

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    My partner has a unit with no mortgage on it as her current PPOR and wants to borrow 80% LVR as an investment loan, tenant the property and buy a new PPOR (house). Using the proceeds of the loan, rather than selling her unit will result in a significant deposit on her new home.

    ANZ have offered funds to cover both properties. The issue is her accountant is advising that the interest on her rented unit will not be tax deductible given:

    'the security for which the loan is taken is secondary to the intention for the loaned money. If the money is being borrowed for your home, even if it is secured against a rental, the interest is technically not deductible'

    Can anyone give some guidance as to whether this advice is accurate? If it is, can the issue be resolved by having a separate investment loan on the unit and a separate PPOR mortgage, either with ANZ or with two separate banks?

    Does the ATO really care what the proceeds of the loan are used for?

    Many thanks.
    GG
     
  2. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Tax deductibility is determined by the purpose, not the security its tied to.

    You're not borrowing to invest but to buy a new PPOR, so it's NOT a deduction.

    A correctly structure portfolio using interest only with full funds in offset would have stopped this situation from happening.
     
  3. Green Grass

    Green Grass Member

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    Thanks Corey, so there are no tax deductions even though her existing property will become an investment property?

    So she is probably better of selling her unit.

    How should this be structured? She has not settled on the purchase and has not rented her unit yet so there is still time to get this right.

    Thanks
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    She is borrowing for a private expense, interest not deductible.
     
  5. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    The property she will draw funds from hasn't been purchased yet?

    If thats the case then borrow with an 80/90% lvr for the purchase, retain the rest as cash in offset. Once she purchases a new PPOR then she can draw the funds from the offset account - maintaining tax deductibility on the investment property and providing funds for her new PPOR.
     
  6. Green Grass

    Green Grass Member

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    Sorry if I have not been clear. Her new PPOR is contracted but not settled. She is still living in her existing PPOR which has no mortgage and on which she wants to draw funds on to support her purchase.

    She could sell her existing home but would rather keep it as an IP. But she needs the funds from sale or leveraging her existing home as an IP to support her purchase.

    Thanks
     
  7. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    One of those times where better credit advice OR "peeling the onion" may have got a much better outcome for the borrower when they took the initial PPOR loan

    ta

    rolf
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Since the existing property is owned she cannot borrow to acquire it. But perhaps a spouse could borrow to buy it. stamp duty may or may not apply depending on the state and the situation, but this allows the keeping of the property as well as obtained some tax deductions
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    still no direct deductability from the income of the old IP.

    she may have some debt recycle options or options for a spousal sale, but in general, it is what it is

    ta

    rolf
     
  10. Green Grass

    Green Grass Member

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    Sorry Rolf, confused. Is there a way to structure this pre settlement of her PPOR purchase which enables her to keep existing home as an IP and get tax deductions?

    thanks
     
  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    possibly, but it is not simple not obvious, nor cheap.

    If she is single, selling to a unit trust with the right stucture may mean she can get 105 % of the value as tax deduction on the interest, but would need to pay Stamps, legals and financial advice

    Most times, we are best off to sell, take the profit with no CGT, and recycle the profit into the new PPOR and rebuild a new portfolio

    ta

    rolf
     
  12. Green Grass

    Green Grass Member

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    Thanks all. So the ATO does not allow normal IP tax deductions if you stop using your home as a PPOR and use it as an IP with debt against it.
     
  13. Green Grass

    Green Grass Member

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    Thanks Rolf.
     
  14. Perp

    Perp Well-Known Member

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    Yes, they do, but only if that debt was incurred for the purpose of purchasing it. The loan used to purchase the IP has been paid off and no longer exists. If she still owed money on it, the interest on that loan would be tax deductible.
     
    Terry_w likes this.
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    They do. but the security used for the debt is not relevant. It was what the money was used for that determines if the interest is deductible.
     
  16. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    As an aside, I bet you fifty cents that ANZ is x-colling your loans.
    Best to get advice now to make sure that a less than great situation isn't made worse.
     
  17. Green Grass

    Green Grass Member

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    Thanks all. Decision made to sell existing PPOR. Seemingly sensible financial management paying off mortgage on PPOR coming back to bite!
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Wow, that was a quick decision!
     
  19. Green Grass

    Green Grass Member

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    If tax deductions not available then as Rolf suggests, makes sense to start again and structure debt and assets better next time. Thanks
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Maybe, but not necessarily.

    Think it through, do some number crunching and then decide. It will cost around 10% to buy and sell a property. sale costs and purchase costs.