I have an investment property with $325k of equity. I want to refinance my current loans including my family home to access $100k to go towards renos on this family home.
The issue I have is that the lender I have spoken to are more than happy to do this for me, but my accountant says I am unable to do this due to tax reasons??? I have family friends that have done this successfully, I am at a loss to why I can’t.
Any advice would be appreciated.
Regards, R.B.Hi RB,
If you were simply borrowing the funds to renovate your PPOR then you certainly can do this. However the interest on the loans would not be tax deductable as the purpose of the loan was not for investment purposes.
If you have purchased the investment property in your own name you may be stuck, but if it is purchased in a trust I am sure there is a way around it. Having said that, there are some pretty good accountants out there who can make almost anything legal so there may be hope for your tax deductability yet.
Cheers,
LukeHi Badlee – welcome to the forum too.
No problems at all. The simple rule to remember is you can borrow against any property you like regardless of whether it is your investment property/ies or your PPOR/family home. It is what you use the money for that determines whether it is tax deductable or not.
This means you simply must keep your borrowings seperate as a new loan, or if your properties are cross secured (both properties secure both loans) you could just increase the size of your loan against your family home.Here's an example.
INVESTMENT PROPERTY worth $500k, with LOAN for $200k. (we'll call LOAN ONE)
YOUR HOME worth $300k with LOAN for $240k (we'll call LOAN TWO)
There is not really enough equity in your home to borrow against for rennos, so you
take out a loan for $100k against your investment property (We'll call LOAN THREE)Now, LOAN ONE is the only one that will be tax deductible, and would typically be set up as an Interest Only loan facility.
The other two loans, would not be tax deductible and typically be Principal and Interest.Even if you dont anticipate a heap of savings, always a good idea to have an offset account (savings/transaction) attached to your home loan, unless of course the lender charges you a fee for it and it is unlikely you would have more than a couple of grand in it at anytime.
Hope that helps.
Cheers
Badlee,
The tax department divides its property categories into PPOR and Investment (as well as others)
So .. living in your property .. and registering it as your PPOR … you arent able to cost in deductions on the interest as part of your loan. So .. you'll be forced to treat it as an ongoing expense with no deductions. Thats .. kind of expensive.
The tax department believes you get enough of a concession with the current treatment of a PPOR property that you receive CGT exemption on the gains .. that you dont need any extra incentives. They're probably right on this.
With an investment property .. your property gets deductions for the interest portion of the loan (NOTE : not the principal !!!) and you can also claim any expenses that go into upkeep. As well as ongoing depreciation.
Your investment in your PPOR is a healthy real return investment .. as its all CGT exempt you add value and its like making a bigger bank account by adding value to your PPOR. But in the maintainence of the loan and ongoing upkeep … its all undeductable expense .. which does add up. This is why your accountant may be costing it in as a major ongoing liability.
Badlee1 wrote:The issue I have is that the lender I have spoken to are more than happy to do this for me, but my accountant says I am unable to do this due to tax reasons???It sounds like you can do it – it just won't be tax deductible.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Just keep the reno loan as a separate loan and make sure you only use that loan for the reno costs.
It does not matter what the loan is secured by. The purpose of the loan determines deductibility. In this case the loan is being taken out for a reno so the reno loan will not be deductible.
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