All Topics / Creative Investing / PPOR becoming an investment property and maximising interest deductibility.

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  • Profile photo of Max78Max78
    Join Date: 2015
    Post Count: 2

    The situation: I have a PPOR worth around $700k and an Investment property worth around $380k. The loan on the PPOR is around $370k and $295k on the Investment Property. I am wanting to buy a new PPOR and rent out my current PPOR as an investment property. I would also be selling the current investment property.

    The proposal: As there is significant equity in the current PPOR, I want to refinance the property to create a nice, new, clean loan value (at 80% LVR) and put the excess funds after paying out the old loan into my current investment property, reducing the loan from around $295k to around $120k. Then I intend on selling the investment property after a few months, releasing all the equity on the property – around $270k. I would then use this $270k as deposit to buy a new PPOR. Following this, I would then rent out my old PPOR with the entirety of the loan interest being deductible. This would chain of events would take course over a period of around 6-12 months.

    My question is: From an ATO perspective, do you think there is a sufficient enough movement of funds from PPOR to investment property then to sale… to ensure that the loan value and subsequent interest on the current refinanced PPOR (that will eventually become an investment property) for all loan interest to be reasonably deducted?

    Walking to run
    Join Date: 2014
    Post Count: 68

    Im not sure about your question but dont forget cgt, may look sus if done in a way they dont like

    Dustin McMahon
    Join Date: 2015
    Post Count: 3

    Where many people get confused with the tax deduct ability of loans is worrying what the loan is secured against. In the eye of the ATO it doesn’t matter what the loan was secured against, it is what the money is used for.

    As much as you move the funds around between loans, essentially you are taking cash out and this is not being spent on your PPOR (which is becoming an investment) so I would not think this would be tax deductible. But definitely check your circumstances with an accountant and see what they are happy for you to do.

    Dustin McMahon 0430 110 304
    Nectar Mortgages
    [email protected]

    Dustin McMahon | Nectar Mortgages
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    Profile photo of TerrywTerryw
    Join Date: 2001
    Post Count: 16,213

    I think I have answered this question before. Doing what you are proposing won’t change the deductibiilty of interest at all. You are just shuffling money around. It is the purpose and use of the borrowed funds that determines deductibility.

    If you sell a property the interest associated with a loan used to purchase that property (whether original or refinanced) will no long be deductible as there is no income to deduct it against s 8-1 ITAA97

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide)

    Profile photo of Richard TaylorRichard Taylor
    Join Date: 2003
    Post Count: 12,024

    Have you considered selling the current PPOR to a Trust and borrowing 100% of the purchase price.

    Sure you will pay Stamp Duty on the Transfer but depending on the numbers could still be well worth it as the full amount of the borrowing could be Tax deductible.

    Funds raised could then be used as deposit on your non deductible PPOR.


    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

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