Can I redraw from a IP loan to limit the size of a new PPOR loan?

Hi,

I am not looking for a 100% legally binding answer, more to see if anyone can point me in the right direction.

May of 2011 i sold my PPOR, since then i have been renting.  When i made this sale my bank told me i had to pay the LVR of my IP loan to 80%, initially i refused to sign the form.  I wanted to keep the cash from the sale from my PPOR for when i brought a new PPOR.  I wanted to put it in a term deposit, or something, and use that to secure the IP loan.  In the end i did as the bank asked.  I have since be told that i didn't have to do this, is this correct?

Anyway, fast forward to today, i am buying a new PPOR, i have been told by my mortgage broker that there is no benefit to be achieved from redrawing my IP loan back to 100%, and using this cash to reduce the new loan on my new PPOR.  He said it could be done, but the ATO would not let me claim the interest on the portion that i would be redrawing as a tax deduction because i am using it to pay for a PPOR, and not an investment.

I also have advice from an accountant, that i can restructure the loans, and can claim the interest on the redrawn portion of my IP loan as a tax deduction.  The argument being that I've got a history showing what the amount of the IP loan used to be, and that i am reverting back to the original amount.

So any comments?  I'm looking for the best structuring of my loans, and would like to do as i've outlined above (this will also make the LVR on my new PPOR loan less than 80%, saving me quite a lot by not needing mortgage insurance).  But i am not looking to do something dodgy and hope to get away with it.  I'm wanting to know 100% BEFORE doing this that the ATO will be happy.

Thanks for any replies.  And if i haven't explained this properly please let me know.

Sounds like your bank cross collaterised your two properties at the start - what you've described (having to reduce the LVR to below 80% is a characteristic of this).

Technically, what your broker is saying is correct. However, you're in quite a unique situation and your accountant is supposed to be the "tax" expert.

Cheers

Jamie

Pass Go Home Loans Pty Ltd - Australia wide Mortgage Broker
www.passgo.com.au | info@passgo.com.au | p. 1300 656 299 | PO Box 286 Woden, Canberra ACT 2606
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This is a classic case of how getting the right structure is so important, beats any "cheap rate" on offer. Also an example of how bank staff will just get you the deal that's easiest for them and "who cares what happens 1-2 years later" ...

Anyway solution.

Your broker is right in saying that you shouldn't "redraw" the loan from the IP to pay for the PPOR as the total loan will no longer be treated as a tax deduction.

Your accountant is also right in saying you can re-structure ( more like you WILL have too) your loan in order to reverse the transaction.
I have one bad and 2 good news for you...lets start with the bad.
Bad news- your gonna have to most likely switch bank.

Good news- Switching banks, sounds like your bank manger you been dealing with either isn't trained with basic tax and property investing strategies + forced you to cross, even though you didn't need to.

Good news- it can be fixed, but what ever you do ...DONT redraw at this point in time. - you will need to re-structure.

Regards
Michael

Michael Chan ----- Finance (Mortgage/Commercial) Broker----
Michael@Shapehomeloans.com.au | 1300 SH LOAN | 1300 74 5626 | Fax: 02 8212 8909|
Same Bank. Better Rates. Served With A Passion.

Your broker is right.

You accountant is wrong. Or, I should say you cannot redraw the money and use it for the new property because the new property will be a personal expense.

Regards

Terryw