I currently live in a prop worth 600K that I have paid off – I have not closed out the Loan.
I am now wanting to buy a new prop to live in worth say 1 Million (as an example)
I want to remortage the 600K property and borrow 400K for the new property and move into the new property.
I then want to rent out the 600K property and have the loan as interest only. Can I then negatively gear the 600K property?
JackieCorey BattParticipant@cjaysaJoin Date: 2012Post Count: 1,010
You won’t borrow 100% on the existing property – you need to retain some equity in there, ie 20% of the value if you want to avoid LMI so that would provide you with a maximum of $480,000.
In reality however you cannot claim tax deductions on this loan if it’s being used as a deposit for your new personal residence – as its not for investment use.
The ATO does not look at what property that the debt is attached to, but what the purpose of the funds are. ie in this example the 480k would have been used to purchase a new residence, so no deductibility.
To try gain deductibility on the debt you could potentially either sell the property to a spouse or a trust you control to then allow you to re-gear the purpose and direct the funds for the deposit, but this will trigger stamp duty and potentially other tax events – best to speak with your accountant.
Thanks so much Corey on your invaluable advice – I really appreciate it.
I was told yesterday by someone (an accountant) that I can do this strategy ie negative gear if I have an Offset account for the 600K property (which I do). They said if I had a redraw facility I could not negative gear. I am quite sceptical of this given the feedback I have had so far.
Does having the Offset account make a difference?
JackieClaudioParticipant@clockworkmioJoin Date: 2015Post Count: 1
Your accountant is correct. The funds parked in the offset account are effectively your own personal funds which can be used for whatever purpose you like. If you withdraw those funds (to say use as a deposit on your new home), the interest charged on the existing loan would still be deductible if the 600K property becomes an investment property.TerrywParticipant@terrywJoin Date: 2001Post Count: 16,190
It depend son your definition of ‘paid off’
There are 2 possibilities
A. Loan balance of say $400,000 with $400,000 cash in the offset account
B. Loan balance of $0 with an offset account (which offsets nothing)
With Option A the property isn’t paid off, but the loan is fully offset. If the cash in the offset is you personal cash, and not borrowed, and the loan has never been redrawn then if you moved out you could claim the full interest on the $400k once the property is available for rent.
With option B the property is actually paid off – but redrawing to use the money for a new main residence the interest will be a private expense and not deductible.
The situation is unclear because you say ‘paid off’ but also you state you have an offset account – which would be impossible if it is paid off, but possible if the loan balance is zero (but unusual). You also say ‘remortgage’ which implies there is not mortgage and if there is no mortgage the loan would actually be paid off – but you couldn’t have an offset account on it if it was!