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  • Profile photo of yixinyueyixinyue
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    @yixinyue
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    Is it legal to refinance your main residence, purchase another residence and then rent out the original residence in a negative gearing set up?

    Profile photo of elkamelkam
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    @elkam
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    Hello yixinyue

    The problem is that the interest on the loan you take out against your current residence and use to finance your new residence will not be tax deductible. The ATO looks at what you used the funds for and not where they came from. In this case the funds will be used for a private purpose.

    If you use the funds to buy another investment than that's a different story.

    Hope this helps
    Elka

    Profile photo of yixinyueyixinyue
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    Elka,

    Thank you very much for the useful information.

    Do you have a web link from ATO regarding this matter?

    Profile photo of elkamelkam
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    @elkam
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    No. Sorry yixinyue.

    I have just tried doing some searches on the ATO site but couldn't find what you asked for. Just in case, here is the link to the ATO site. Maybe you will know how to do it better or maybe someone else will be able to help you.

    http://www.ato.gov.au/ 

    Unfortunately the answer I gave you is correct. If you search this forum you will find that it has been discussed often as this happens to many people.

    One of the beauties of planning ahead and using an offset account is that this is avoidable.

    Cheers
    Elka

    Profile photo of elkamelkam
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    OK. I had a minute to spare and since you are new to the site I have searched it for you. 

    Here is a link to a thread covering this very topic. If you go to the second post, by duckster, you will find a link to the ATO information you are looking for … as he says …. on page 10.

    https://www.propertyinvesting.com/forums/getting-technical/finance/4320233?highlight=PPOR%2Cloan%2Cinterest%2Cdeductible

    Elka

    Profile photo of yixinyueyixinyue
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    Thank you so much.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
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    Nothing to stop you selling the existing PPOR into Trust, paying the stamp duty but borrowing 100% of the valuation and then using the funds to purchase your new PPOR.

    The total amount of the interest raised is then tax deductible.

    Remember to structure your new loan correctly incase a few years down the track you decide to do it again.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of yixinyueyixinyue
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    Remember to structure your new loan correctly incase a few years down the track you decide to do it again.???

    What is the CORRECT way to structure a new loan for the primary residence? I am told by an accountant that no interest can be tax deductible even the primary residence is converted to the IP with a loan.

    Thanks
    yxy

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
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    YxY

    Hate to say your accountant is wrong. if the property is sold to a Trust with you as Trustee and you borrow 100% of the value then you are able to claim 100% of the interest deduction.

    The funds you raise will be used to purchase a PPOR as there is no loan on the original property.

    All 100% legal and acceptable to the ATO. Might cost you some extra stamp duty but if the property was originally owned as Joint Tenants with the spouse not working the savings can be significant over years.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of MooseheadMoosehead
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    Yikes I am getting confused here.

    Elkam could elaborate on what you mean by planning ahead and using an offset account?  Sorry just not following there.

    I would have thought that whichever house your are not occupying could be considered as an investment property in the eyes of the ATO and therefore any interest accruing against would be deductible.  Not that simple? 

    ie

    1.  Refinance PPOR for purchase costs & deposit of new PPOR

    2.  Move into new PPOR

    3.  Rent out old PPOR transforming it into an IP

    4.  From day one that IP is tenanted, interest accrued against it is deductible

    This leads me to another question …Does an IP have to be tenanted to deduct interest?  Can you negative gear land for example?

    Profile photo of elkamelkam
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    Hello Richard

    Previously I thought the method you suggested worked by setting up a HDT and then borrowing money to buy units from the trust. The money the trust recieves from the sale of the units is then used to buy the property. Because the borrowed money was used for an investment (to buy the units) then the interest on this was tax deductible. However, I thought the recent ATO ruling knocked that on the head?. Am I wrong? If I'm wrong can you tell me how it is still possible please. 

    Thank you
    Elka

    Profile photo of elkamelkam
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    Hello Moosehead

    Whether interest on a loan is tax deductible or not depends on what you did with the money you borrowed. If you bought yourself a nice boat, it's not tax deductible. If you bought yourself a house to live in (PPOR) it's not tax deductible.
    It does not matter which asset you used to secure the loan.

    In the 4 steps you outlined above, the asset you used to secure the loan may become an IP but that's irrelevant in this case. You used the money for private purposes. i.e. to buy a PPOR. so no tax deduction for the interest on that money.

    However, if there is still an original loan on the property then the interest on that part is tax deductible.

    For example you have a $300K loan on your PPOR. You borrow an additional $100K against the property to buy yourself another PPOR and turn the original one into an IP. 

    Interest on the $300K is tax deductible.
    Interest on the $100K is not tax deductible.

    Actually Richard is the expert in the area of loan structuring so I hope he will correct me if I explain it badly. I can do it best with an example.

    You buy a PPOR and take out an IO loan with a 100% offset facility.
    You put all your money into the offset account to save interest.
    If you ever decide to turn this property into an IP and buy yourself another PPOR then you simply use whatever money you need from the offset account to finance the new place. You also link this offset account to the new loan (for your PPOR).
    The money in the offset account is now working to reduce the non deductible interest on you PPOR.
    The interest on the loan for what has now become an IP increases as it's no longer being offset but this interest is all tax deductible.

    Hope this helps.

    Elka

    Profile photo of Richard TaylorRichard Taylor
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    Hi Elka

    There are several ATO rulings on HDT which are totally different to the question being raised here.

    In simple terms let us assume that you own your current PPOR valued at $300K with no mortgage and wish to rent it out and at the same time want to buy another house to live for 300K as well.

    If you borrow the $300K to buy the new PPOR irrespective of what the security will be then the interest is not tax deductible as it fails the ATO "Purpose Test".

    What you would do is sell the original PPOR which is probably held as Joint Tenants to your Trust for $300K and pay stamp duty on the value of the Transfer.

    The Trust would then borrow an amount of $300K to buy the investment property (originally your PPOR) from yourself and the full amount of the interest becomes deductible as the purpose of the funds were to buy an investment property.

    As you receive the $300K and have no loan upon the property you can now pay cash for your new PPOR.

    Remember an HDT is not the only structure you can use although the ones we use appear to comply with the ATO ruling on such.

    Hope this now makes sense.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of elkamelkam
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    Hello Richard

    My question was full of assumptions which I neglected to verbalise. 

    You explanation is crystal clear but what structure would you use which wouldn't trap the loses ( I assume the property would be negatively geared on 100% lend) within the entity, besides a HDT. 

    Don't answer if you'd rather not but is the HDT you use one developed specially for you or is available for purchase from one of the solicitors specialising in investment structures. 

    The ruling I meant is in the link below. I'm a total lay person in this area but when I read this I thought is spelt the end of this usage for HDTs.

    http://www.ato.gov.au/rba/content.asp?doc=/rba/content/65710.htm 

    Hello Moosehead

    I forgot to answer your last question.
    A property has to be income producing for you to be able to claim the interest on the loan. Vacant land is not usually income producing.

    Cheers

    Elka 

    Profile photo of MooseheadMoosehead
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    Thanks Elka I think I get it now. 

    I just assumed as soon as you moved & declared your old place an IP everything would be deductible but it's not that simple… the devil is always in the detail isn't it.

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