All Topics / Help Needed! / Moving home – Is it possible to convert the existing home to an investment

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  • Profile photo of PrimerPrimer
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    @primer
    Join Date: 2007
    Post Count: 4

    We are thinking of moving home. We must buy a propery in a diffenent area. The best would be to keep our home now as investment. However the current home is almost debt free, we have made a lot of additional payments.
    The question is if it is legally possible to borrow the money againt the existing home and put into the new home so the existing home can be vialbe as an investment? or do we have to sell the existing?

    Thanks

    Profile photo of pasandbecpasandbec
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    @pasandbec
    Join Date: 2005
    Post Count: 122

    Hi there,

    I'm by no means an expert in this area, but I have asked a similiar question myself in the past. As far as I know, you CAN borrow money againt your home/PPOR (principal place of residence) for the new property and turn it into an IP (investment property) BUT you won't be able to claim any of the interest on the IP (it would be breaking tax laws if you did) there fore it doesn't make it a viable investment.

    Hope that helps.

    Profile photo of pasandbecpasandbec
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    @pasandbec
    Join Date: 2005
    Post Count: 122

    A better option might be to sell current PPOR, put profits towards new PPOR (have any excess sitting in an offset account, not in redraw, so you don't encounter the same problem again in the future should that place turn into an IP) and then buy a new IP.

    Profile photo of PrimerPrimer
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    @primer
    Join Date: 2007
    Post Count: 4

    Got it, thanks.
    This means I have to sell my current home and put the proceed toward the new PPOR.

    Profile photo of pasandbecpasandbec
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    @pasandbec
    Join Date: 2005
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    and a new IP, should you wish to have one.

    but put the profits of your sale into a linked OFFSET account (linked to your PPOR loan, to reduce interest), not directly onto the loan (in redraw), otherwise if you decide to turn that place into an IP down the track, you'll be faced with the same problem….

    Profile photo of L.A AussieL.A Aussie
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    @l.a-aussie
    Join Date: 2006
    Post Count: 1,488

    Hi Primer,
    you can convert the existing PPoR into an I.P (we are doing it while in the USA), but after you do this, the money you borrow from your existing PPOR to buy the new PPoR CANNOT be claimed as a tax deduction.
    The ATO looks at the PURPOSE of the loan when assessing the tax deductibilty of it, so you would not be eligible for any tax breaks in that scenario.
    Of course, the holding costs and any loan interest you still have on the existing PPoR (which is now an I.P) will be tax deductible.

    You have 3 options:
    1. Keep existing PPoR, convert to I.P and rent out. Because you have little debt on it, it will probably be cashflow positive (good). You will have to pay tax on this profit, but you can minimise most of it through your tax deductible holding costs of the property. The nett profit will be paid directly onto the new PPoR loan to decrease that debt.
    2. Sell existing PPoR, use funds to buy new PPoR, which will leave new PPoR with less debt. Then access available equity to buy and I.P (or more). Then interest on the equity borrowed from new PPoR and the new I.P loan, plus all holding costs on the I.P are tax deductible.
    3. Keep existing PPoR, convert to I.P, buy another I.P (can be used as PPoR at a later date) and find a nice place to rent yourselves. This way, the loan on the existing PPoR and the new PPoR (which is being used as an I.P) will be tax deductible, along with all the holding costs. In most cases, this is cheaper than a loan on you own PPoR (in your case maybe not as the PPoR is almost debt free), and will accelerate your wealth building considerably. Most people won't do it as they are emotionally attached to their PPoR and have to live in it.

    As per option 3, if you move into the new PPoR for a period of time before you turn it into an I.P (I'm not sure what the period is – maybe 6 or 12 months), you cannot claim any of the interest etc as it is your PPoR, but when you move out and use it as an I.P you can do this for up to 6 years before you become liable for any Cap Gains Tax if you ever decide to sell it in the future.

    Profile photo of PrimerPrimer
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    @primer
    Join Date: 2007
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    Hi Marc,
    Very comphrehensive and professional oppionion, thanks heaps!
    Option 2 seems the only option, as for option 3, we are still puting equity in I.P, not PRoP, the intest reduced becomes taxable income, this is the last thing I want.

    Cheers

    Profile photo of doondoondoondoon
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    @doondoon
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    Thanks for that very helpful information, Marc! My husband and I are paying off a 2-bedroom apartment a bit of a distance from the city (where hubby works) and we're considering renting it out and renting somewhere closer to the city. I didn't think it'd be a wise option (money-wise) but now I think I will look into it more :)

    Profile photo of L.A AussieL.A Aussie
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    @l.a-aussie
    Join Date: 2006
    Post Count: 1,488

    Absolutely doondoon.
    If the unit is newer (built after 1987) there will be good depreciation for the tax returns as well. Talk to a good accountant about your strategy there.

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