We have a PPR owing $170k on a Principle and interest loan which is valued at $500k. We just bought an IP at 100% investment only loan, using the equity in the PPR.
We want to swap houses. If I rent out the PPR and move to the IP, under the above structure, I would loose the large negative gearing claim and probably end up positively geared. This negative gearing claim is what makes it all affordable and comfortable.
Can I just swap the loans? Are there any tax rulings on this situation? I am not sure how we then value the property. The bank has valued my PPR at $500k. I would have thought I could just refinance the original PPR to reflect a 100% investment only loan based on the banks latest Value of $500k . We would then take the equity over to the other new property. This would increase our Principle and interest loan in the house we move to. I am willing to forgo the 100k in loan interest differential by doing it this way as it is a lifestyle choice. However I cannot afford to completely forgo the tax benefit.
My main concern is the legality of the situation. Can I just SWAP and still claim? Is it illegal to swap loans as to maximise tax benefit?
Any help in this situation would be of great help.
Hi PPR, and welcome to our Forum.
You can swap and you can reverse your current PPR with your IP. But, with regards to the tax implications however, if you are using a 221d variation then that shouldn't change if your leverage remains the same but your claimable depreciation allowances will change if your current PPR is older than your current IP.
In regards to your finances, the biggest hurdle I see you facing is that on a re-finance lenders won't lend above 90% so if you took out a 100% loan and haven't experienced enough capital growth it may be a costly exercise.
SUMMARY: you should talk with a mortgage broker as well as someone who is qualified to help you factor in the tax implications of making these changes.Hi PPR
Yes you can swap the houses but CANNOT claim a Tax deduction on the increased loan merely by refinancing the property as interest deductibility is based on the purpose and not the security.
As i have said on this forum many times before you could borrow funds for investment secured against a pogo stick and the interest would be deductible.
Depending on how much time you have on your side, in which State the PPOR is located and how it is held (i.e solely by you / jointly etc) will depend on your options but any change is likely to incur some form of cost i.e stamp duty.
Again without knowing all of the facts and figures it is difficult to make comment but if you are wanting to investigate I would put a stop on your refinance application immediately.
Hopefully your Bank hasnt given you any advice to this effect.
If you decide merely to go ahead with the purchase accepting the fact that you cannot claim the additional interest further consideration needs to be given to the loan structure. You do not ideally want in that case the 2 securities cross collateralised.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Deductibility depends on the purpose and use of the funds borrowed. So if you borrowed $200,000 for an IP and that IP becomes a private residence then the interest on that $200,000 will no longer be deductible.
What you could do is talk to a tax expert about setting up a LOC on your PPOR, in addition to your $170,000 loan, and then use this loan to pay the interest on your $170,000 loan. ie borrow to pay interest. The freed up cash, together with wages and rents, can then go into a 100% offset account against the new loan (new PPOR, current IP). This will free up cash to pay down the private debt fast while increasing your deductible debt.
This needs careful planning thous, don't do it on your ownTerryw | 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
Terryw wrote:Deductibility depends on the purpose and use of the funds borrowed. So if you borrowed $200,000 for an IP and that IP becomes a private residence then the interest on that $200,000 will no longer be deductible.What you could do is talk to a tax expert about setting up a LOC on your PPOR, in addition to your $170,000 loan, and then use this loan to pay the interest on your $170,000 loan. ie borrow to pay interest. The freed up cash, together with wages and rents, can then go into a 100% offset account against the new loan (new PPOR, current IP). This will free up cash to pay down the private debt fast while increasing your deductible debt.
This needs careful planning thous, don't do it on your ownThanks, just wondering about the legality of this?
PPR remortgage wrote:Terryw wrote:Deductibility depends on the purpose and use of the funds borrowed. So if you borrowed $200,000 for an IP and that IP becomes a private residence then the interest on that $200,000 will no longer be deductible.What you could do is talk to a tax expert about setting up a LOC on your PPOR, in addition to your $170,000 loan, and then use this loan to pay the interest on your $170,000 loan. ie borrow to pay interest. The freed up cash, together with wages and rents, can then go into a 100% offset account against the new loan (new PPOR, current IP). This will free up cash to pay down the private debt fast while increasing your deductible debt.
This needs careful planning thous, don't do it on your ownThanks, just wondering about the legality of this?
Yes, perfectly legal. I have posted here before a few links to private rulings which were passed and some which were rejected. You must be careful in how you structure it as the ATO could disallow the deduction if you are entering into a 'scheme' with the dominant purpose of a tax deduction. Before doing this you should really apply for a private ruling to be safe.
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
ALF1 wrote:Hi PPR, and welcome to our Forum.You can swap and you can reverse your current PPR with your IP. But, with regards to the tax implications however, if you are using a 221d variation then that shouldn't change if your leverage remains the same but your claimable depreciation allowances will change if your current PPR is older than your current IP.
In regards to your finances, the biggest hurdle I see you facing is that on a re-finance lenders won't lend above 90% so if you took out a 100% loan and haven't experienced enough capital growth it may be a costly exercise.
SUMMARY: you should talk with a mortgage broker as well as someone who is qualified to help you factor in the tax implications of making these changes.Anthony,
Thankyou very much for this reply. Can I clarify this?
How does the PPR being older change things? I have lived in this PPR for 8 years and made $300k profit on the original $200k purchase price. The bank Val came in at $500k.
I have not settled on the new investment property yet. If I swap loans to reflect my current PPR as my new investment property, I would change the loan to interest only and max up to about 450k – 500k depending on my bank. I would then only owe $330k odd on the new property and happily pay that property off with priciple and interest.
This would reduce my negative gearing rebate but is more a lifestyle choice. If I go with original plan and rent out the new address, I can claim all 600k of interest loan. I would have thought this is a no brainer for the ATO to allow?
Is there a way to clarify with the ATO?
PPR,
You currently owe $170,000 on your PPOR mortgage. If you "max up" the loan to $500,000 that would mean you are borrowing an extra $330,000. The deductibility of the interest on this extra $330,000 will depend on what the funds are used for.
I think you are confusing yourself about "swapping loans".
eg If I borrow $10 to buy a book and $20 to buy a chair, how would you swap loans? It doesn't make sense. The $10 was borrowed to buy a book, so how could you now attribute it to the chair?
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
Unless as i mentioned you look to purchase your Spouses interest in the property out or sell the property to a Unit Trust.
Changing the purpose can mean the interest deductibility also changes.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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