My fiance and I plan to purchase a new property to live in within the next 12 months and plan to rent out our current residence.
The mortgage is very low in comparison to the value of the property so we have a massive amount of equity available and the rent will be significantly higher than the mortgage repayments.
We want to ideally minimise the loan in our new house where we will reside and maximise the loan on the IP to claim as much as possible on tax.
The question is how we structure the loan/s?
Any assistance of any kind would be more than appreciated!
The ATO only cares about the loan purpose ,not the use of the property it is secured against. Your "good debt" is that used to purchase an income producing asset which in your case is the remaining amount on the property to become the IP.
So, in the absence of borrowing against your IP (or whatever) to buy additional income-producing assets, your tax deductible debt is the amount currently sitting there and no more.
Correct me if i am wrong, for example if I currently have a mortgage of $170,000 and the value of the property is $550,000 and I decide to refinance the mortgage, before I purchase another property, so that the mortgage shall become ie $300,000. I'll still only have $170,000 to pay but with $130,000 sitting there draw upon.
So if our new residence that we buy costs $400,000, we have $50,000 deposit, can I draw the $130,000 to add to the deposit totally $180,000 and hence the mortgage on the residence will be $220,000.
The previous residence now becomes the IP with a mortgage debt of $300,000 rather than only $130,000.
The question, is this possible???
AnthonyJF wrote:Correct me if i am wrong, for example if I currently have a mortgage of $170,000 and the value of the property is $550,000 and I decide to refinance the mortgage, before I purchase another property, so that the mortgage shall become ie $300,000. I'll still only have $170,000 to pay but with $130,000 sitting there draw upon.
So if our new residence that we buy costs $400,000, we have $50,000 deposit, can I draw the $130,000 to add to the deposit totally $180,000 and hence the mortgage on the residence will be $220,000.
The previous residence now becomes the IP with a mortgage debt of $300,000 rather than only $130,000.
The question, is this possible???
Ummm… Wrong, unfortunately….
You currently owe $130k on your PPoR (for example). If you top up your loan to purchase a NEW PPoR, your deductible interest will be… $130k. This is because the extra interest incurred is not done so as a result of making income i.e it's not for investment purposes. If you top the loan up to, lets say $400k, interest on the extra $270k is not deductible.
If you're after having *a* PPoR debt free and are open to another possible solution… Stay in your current PPoR, top your loan up to purchase a new IP almost outright, postively gear it and use the income to pay your PPoR off quicker. This will of course INCREASE your taxable income, but if you structure it in a trust you can allocate that income so that it goes to the person on the least income – minimising the effect that can have.
The interest on the topped up amount, whilst not deductible by yourselves, is deductible in the trust so the net effect is the same.
Make sure you clearly define your objectives and speak with an accountant about suitable structures for your situation – they are the building blocks for strong investment.Stay in your current PPoR, top your loan up to purchase a new IP almost outright, postively gear it and use the income to pay your PPoR off quicker. This will of course INCREASE your taxable income, but if you structure it in a trust you can allocate that income so that it goes to the person on the least income – minimising the effect that can have.
The interest on the topped up amount, whilst not deductible by yourselves, is deductible in the trust so the net effect is the same.
I must admit i like Imulgi's enthusiasm but this is not quiet correct (assuming i understand the post). If you gear the property to 100% it is unlikely to be positively geared in the current climate. Furthermore you can distrubute any surplus rental income to the beneficiares if the property is purchased in a Discretionary Family Trust. Under such a structure the interest is not deductible within the Trust structure as any loss is preserved in the Trust.
If you use a HDT or Unit Trust then you loose the flexibility of the income distribution as the income needs to be allocated in accordance with the Unit holding.
On consideration is to think about selling the current PPOR into a Trust structure (probably a Unit Trust depending on the numbers involved) and pay the additional stamp duty. Borrow 100% of the current market valuation and use the net surplus funds (difference between the market value less the current loan) as deposit on your new PPOR. The entire interest for the loan on the old PPOR becomes dedcutible and the new loan is negligble depending on the actual purchase price.
If there is some variance in the marginal tax rate of the current owners this strategy becomes even more effective as with the present situation it is likely the property is held as Joint Tenants and therefore the income and expenses are shared equally.
Richard Taylor | Australia's leading private lender
Qlds007, I very much like this Unit Trust suggestion. You mentioned "depending on the numbers involved" for a Unit Trust so to make it work well how many is enough?
For example at the moment my fiance is not working and we are expecting a baby within the next few months. So having three family members would be suitable?
I must also admit this is great assistance by all who contribute!
Anthony
Precisely, at the moment the interest deduction on your current loan assuming the property is jointly owned will be shared
50 / 50 giving little value to your fiance.Richard Taylor | Australia's leading private lender
Richard, you misunderstand me… You have more eloquently written what I was thinking, however you have sold the ppor into the trust whereas I have placed a new IP in the trust – not really fulfilling the requirement of Anthony having a new ppor. Either way, the IP in the trust has little if any loan, making it CF+ and contributing cashflow, allocatable as they see fit, to any loan Anthony takes out for or from his current or future ppor
Please correct me if I’m wrong.Hi all,
I am in a very similar situation and I look like using a Unit Trust to put our old PPoR and buy a new PPoR. The catch is the capital gains. So make sure you factor this into your sums. I can recommend a good book if you would like to email me offline. It explains the concept in a very easy way.
There is no CGT on the sale of the PPOR to a Unit Trust.
Richard Taylor | Australia's leading private lender
Hi all – the latest newbie here. I am currently living in a (cheapie) home I purchased just over a year ago. Current value around $280k with a $235k mortgage – fixed for another 30 months. Looking at moving in with boyfriend who owns his house outright. I have an income around $85k.
Anyone able to give me advice on what I should/need to do to change the house to an investment property? Also the timing of any repairs/renovations to maximise tax deductions for these items?
thanks in anticipation
kezzah62 wrote:Hi all – the latest newbie here. I am currently living in a (cheapie) home I purchased just over a year ago. Current value around $280k with a $235k mortgage – fixed for another 30 months. Looking at moving in with boyfriend who owns his house outright. I have an income around $85k.Anyone able to give me advice on what I should/need to do to change the house to an investment property? Also the timing of any repairs/renovations to maximise tax deductions for these items?
Moving in with boyfriend – never know the future could be short term.
Just use the 6 year window of renting it out maintaining the PPOR and CGT free status. This is until YOU become the owner of another property where you live.
Consider a binding financial agreement to ensure you keep what is yours if things don't work out – of course who knows you might have more to gain by not doing this based on the information already provided.
Remember defacto is as good as married from a property settlement view point.
If you live rent free with him – you benefit which means he would then potentially gain a share of your net equity if you were to split up.
Think about the big picture when making decisions.
Hi There
This is not professional advice, but, what you are seeking to do in my expierence is not possible. It is the purpose of the origional loan which determines that it is tax deducible or not. You may be better of selling your current home and using a cash deposit (as much as you can afford) to buy your new home. Then, you take out a new LOC (line of credit) secured against the new house, and these funds can be used for purchasing new investment properties…or as the deposits and costs ie stampo duty ect)
This is the advice I have personally recieved from accountants in the past (regarding the tax side) but you should get your own independant advise.
sorry probably NOT what you wanted to hear.
Cheers
Maggie SmithHi Maggie
Thankfully this is incorrect It is the purpose of the origional loan which determines that it is tax deducible or not.
You are half right. When the property is offered for rent the interest on the balance is available to deduct for tax purposes. If however you have redrawn or refinanced then only the original balance can taken into consideration.
Kezzah. If your loan is Principal & Interest I would suggest switching this to a interest only loan and assuming you have no non deductible debt linking the loan to a 100% offset account. If the loan is fixed depending on the lender the options maybe limited.
Some fixed rate loans still alow offset accounts but these are few and far between.Richard Taylor | Australia's leading private lender
Confused. I am in the same situation but have no mortgage. I have moved out of PPoR and is currently being rented. I have no other properties. However, I refinanced 200k on investment house and land package which unforetunately had to sell. I have kept this interest only loan of 200k (7.62%), and have the 200k cash from the sale of the land.
should I keep the house? or pay out the loan?
should I sell the house? (200m from beach on Sunshine coast!) buy a new PPoR and start again?
any advise appreciated.
The interest is not tax deductible so unless you are getting more than 7.62% net of tax I would look to pay the loan back.
Nothing to stop you using the security to gear again for a new IP and claiming the interest as a deduction.
Will probably still be positively geared but use the income to reinvest and go again.
Richard Taylor | Australia's leading private lender
Wealth Accumulator wrote:kezzah62 wrote:Hi all – the latest newbie here. I am currently living in a (cheapie) home I purchased just over a year ago. Current value around $280k with a $235k mortgage – fixed for another 30 months. Looking at moving in with boyfriend who owns his house outright. I have an income around $85k.Anyone able to give me advice on what I should/need to do to change the house to an investment property? Also the timing of any repairs/renovations to maximise tax deductions for these items?
Moving in with boyfriend – never know the future could be short term.
Just use the 6 year window of renting it out maintaining the PPOR and CGT free status. This is until YOU become the owner of another property where you live.
Consider a binding financial agreement to ensure you keep what is yours if things don't work out – of course who knows you might have more to gain by not doing this based on the information already provided.
Remember defacto is as good as married from a property settlement view point.
If you live rent free with him – you benefit which means he would then potentially gain a share of your net equity if you were to split up.
Think about the big picture when making decisions.
Hi
Unfortunately couples are only able to count one house as their main residence at any one time (except for a 6month period of overlap). Couples include married and defacto couples. The 6 year rule could still work, providing they two people are not married/defacto or they would have to chose which property to have as their main residence.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
This thread seems to have become the community trough from which people are drinking advice on this matter from… Perhaps one of the mods could make it a sticky?
Please correct me if I’m wrong.
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