My first post here though I’ve read the forum for a bit
I have a PPOR with substantial equity. I’m now moving cities so looking at the possibility of acquiring a new PPOR. My thinking was to convert my existing PPOR to an IP.
If I rent my existing property out, I expect it would be positively geared. I’m guessing the ATO doesn’t let you withdraw equity (which would transfer to the new PPOR) to negatively gear my existing PPOR?
And one more question: are there any downsides to using equity in an existing PPOR to finance the deposit for a new PPOR?
Thanks guys, I appreciate any advice and realise it is only opinion and nothing else
Firstly welcome to the forum and I hope you enjoy your time with us.
No regretfully accessing equity in your PPOR will not enable you to claim additional interest when the property becomes an IP. Interest can only be claimed on the current balance.
If you need to acess the equity for a deposit on your new PPOR keep the loans separate. Draw 20% plus costs of the new purchase price on your existing PPOR (future IP) and then 80% secured against your new property.
Is one other option but before we go there. Is the property owned solely by you ?
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks for your response and your welcome The existing property is solely in my name but my partner and I are listed on the mortgage. Haven’t really considered who would ‘own’ the new property.
So I’m having a little trouble understanding. If I redraw on my PPOR now, then the balance would be much more negative. If I then convert that PPOR to IP when I acquire a new PPOR, the balance might be such that rent does not meet the repayments. Wouldn’t that in effect be making the converted IP a negatively geared investment?
Unfortunately, regardless of when you drawdown the equity in your PPOR, you won't be able to claim this as a deduction when it converts to an IP.
The basic rule is that the purpose of the funds used determines deductibility of the interest. So if you drawdown to purchase a new PPOR, the interest on the drawdown would not be deductible.
Which is why Richard has suggested getting a separate loan for your PPOR deposit. It means you can pay the non-deductible debt down faster, and also makes it easier for your friendly accountant come tax time.
What you can do to help the situation is to: 1. Start borrowing money to pay for all expenses associated with that property – rates, insurances 2. Look at setting up a system whereby you can borrow to pay interest on the loan for the IP.
You will find this frees up cash which can then be used to pay down the new non-deductible mortgage – or better put in offset, in case you move out again.
You need to set this up properly or the ATO may deny deductibility, so see a professional before implementing.
Terryw: I can see how that would help, but wouldn’t the loan situation on my current PPOR start getting very messy if I begin redrawing regularly to cover expenses on it? Or do you mean after it becomes an IP start doing that?
Doesn't really matter when you withdraw. the sooner the better. WOuldn't be messy if all the money withdrawn was used for that property. If it later becomes an investment all the money was borrowed for that property so the interest would probably be deductible.
This depends on what reason you are selling the property, if for a tax deduction it will come under Part IVA. If you sell the property to your wife because your wife believes it is a good investment and you do not wish to hold the property, I have also known people to sell properties to a trust for asset protection purposes (in both these cases a tax deduction may be allowed on the refinance of the loan of the investment property).
In any event it will depend what state you are in whether or not stamp duty is payable.
Capital gains tax may also be an issue if the property was ever leased.
Seek professional advice on this one to see where you fit as there are many variables that surround a complex decision such as this.