- CraigParticipant@200seriesJoin Date: 2017Post Count: 2
I have a property that I purchased in 2001 as my principal place of residence and moved out in 2006. I then moved into company supplied housing through my employer and rented out my principal place of residence, with the intention of moving back into my house when I left the employer.
This house has been rented out from 2006 until the present time.
In 2013 I left the employer, however purchased another property as my principal place of residence, and continued to rent my first house out.
Due to owning the first house house for a significant period of time, and combined with the original purchase price there is very little mortgage left on it. The majority of the mortgage is on the house I purchased in 2013 – which is not good for tax purposes.
The tenants in the rental property have now given notice, and I am undecided what to do.
1. Do I put the house purchased back in 2001 on the market and sell, with the intention of paying off my current property.
2. Is there anyway I can re-finance the original property – increase the mortgage so it becomes more tax effective. Transfer the funds to the property I am living in – Essentially the same debt, but the debt allocated to the rental
The main reason I ask is, the original property is sub-dividable, and I would like to hold onto it into the future, but at present it is not tax effective as it is positively geared the way the mortgages are at the moment.
ThanksBennyModerator@bennyJoin Date: 2002Post Count: 1,416
As I understand it, taking a mortgage against a house that is an investment property doesn’t necessarily mean the loan will be deductible. This is because the deductibility is based on the REASON for the loan. And, in your case, if the reason is to pay down your PPOR, then that is personal, and thus non-deductible.
HOWEVER, if you borrowed against the IP to purchase another IP, or even shares(?), then it very well could be deductible. There is a whole lot to it, and I would suggest you run your situation by a Mortgage Broker to see where you sit, discuss your goals, and have them look to see the best way forward for you. Lots of good ones on here – check some signatures of those replying to finance questions.
BennyTerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
Here is an article that I wrote a while back:
11 Strategies for when you move out of the PPOR and keep it
There are several things that can be done to improve the tax situation of moving out of the main residence and into a new main residence while keeping the old main residence and renting it out. Often there will be large amounts of equity in the original property while the new property will be purchased with a loan and it will have non-deductible interest payments. On top of it the rent from the old PPOR will be taxable with little to deduct!
So here are some strategies:
Strategy 1: Sell First property
If you sell the first property you can then use the proceeds to pay down the non-deductible debt on the second property and then borrow to buy another property for investment.
Spouse A owns 100%
Spouse A sells to a stranger
Spouse A and B own 50% each
Spouse A and B sell to a stranger.
Strategy 2: Sell First property to spouse
If the first property is owned solely by Spouse A it could be sold to the Spouse B.
Spouse A owns 100%
Spouse A sells to Spouse B
Spouse B owns 100%
This will allow the non-owner spouse to borrow to buy the property which will then be rented out. The interest on this loan will be deductible. The advantage here is that there would be no agent’s fees and the property can remain in the family.
The added advantage is that duty may be exempt in certain states – this needs legal advice. The property may also be exempt from CGT as well.
Strategy 3: Sell share of the property to spouse so there is one owner
Where the property is held jointly it may be possible for 1 of the spouses to sell their share to the other spouse so that the end result is that there is 1 owner.
Spouse A and Spouse B own
Spouse B sells 50% to Spouse B
Spouse B becomes sole owner
This can also be done where the ownership percentages are not even
Spouse A owns 80% and Spouse B owns 20%
Spouse B sells the 20% to Spouse A
Spouse A becomes sole owner
The purchaser would borrow to buy and thereby increase deductible interest while money release is used to pay down the new loan. Similar to Strategy 2.
This may also be exempt from duty in certain states but subject to duty in others.
Strategy 4: Spouse 1 Sell 50% to Spouse B and later sells other 50% to B
Similar to Strategy 3 above, Spouse A sells 50% to Spouse B now. The house is then jointly owned. Spouse A then sells the remaining 50% to B – just after or potentially years later.
Spouse A owns property 100%
Spouse A sells 50% to Spouse B
Spouse A and B become owners 50% each
Spouse A sells 50% to Spouse B
Spouse B becomes sole owner
The advantage with this is reduced stamp duty in some states such as NSW. Instead of paying duty on 100% of the transfer you would only pay duty on 50%.
See Tax Tip 50: Minimising duty on Spousal Transfers Tax Tip 50: Minimising duty on Spousal Transfers
Strategy 5: Sell to a related trust
This is more complex strategy and there are many other issues to consider.
Spouse A and B own
Spouse A and B sell to the AB trust
AB Trust becomes owner
AB Trust borrows to acquire the property and would be able to claim the interest on the loan used to acquire the property as a tax deduction.
Spouse A and B are left with a pile of cash which they use to pay off their new PPOR debt.
This would be a CGT event – but if the house was the main residence it may be exempt from CGT in full. It would likely be subject to stamp duty though.
Strategy 6: Sell to a fixed unit trust with the original owners borrowing to buy the units
This strategy will incur stamp duty, but it allows the property to be retained and for negative gearing benefits to be achieved.
Spouse A and Spouse B jointly own a property
Spouse A and Spouse B sell to the AB Fixed Unit Trust
The trustee of the AB Fixed Unit Trust purchases the property
Spouse A and B borrow to acquire units in the AB Unit Trust
Because they have borrowed to acquire units which will produce income the interest on this loan will be deductible to both A and B.
If the trust qualifies there will be land tax savings too in some states. In NSW land tax could be assessable to the owners of the units so spouse A and B will get the land tax threshold.
Legal advice is essential for this complex scenario as are private ruling applications for both OSR and Land tax. I have received positive rulings for this done in NSW.
Strategy 7: Debt Recycle A
Use the rental income from the first property to help pay down the loan on the new property.
The original property should be positive cash flow as it would have low debt. This cash flow can be used to assist in the payment of the loan for the new PPOR.
The downside of this approach is that the income from the property will be taxable and the interest on the new PPOR loan will not be deductible. But you avoid the costs and hassle of transferring title.
Strategy 8: Debt Recycle B
Use the rental income as above. But access the equity to buy another property. After capital growth has occurred sell the other property and pay down the non-deductible debt
Strategy 9: Debt Recycle C
Once you move out you start borrowing to pay for expenses associated with the property – rates, insurances, repairs etc. Everything except for interest on the loan – but this may even be possible in some circumstances.
Strategy 10: Debt Recycle D
Pay down the new PPOR as quick as possible and borrow to buy income producing assets such as shares. The income from these assets can then be used to pay down the PPOR debt even more and more income producing assets purchased.
This may be done on using a loan secured by the old PPOR too. Security for the loan doesn’t matter, what matters is that you use the debt to pay off the non-deductible debt quicker.
Strategy 11: Planning from the beginning
If you are starting out into a PPOR then simply plan ahead. You may want to consider:
– Owning the property in just 1 name as this will allow the sale to the other spouse down the track;
– Borrowing 105% from the start as this will allow a higher loan to be retained and this will improve deductions once you rent the property out;
– Borrow on an IO basis as this will keep the loan balance high;
– Borrow to pay for all repairs and maintenance;
– Borrow to pay for property related expenses such as rates, insurances etc
– Capitalise interest where appropriate (get tax advice);
– Live in victoria as this will save you stamp duty in the future if you ever sell to each other.BennyModerator@bennyJoin Date: 2002Post Count: 1,416
What an awesome list of options. A lot of people could do with knowing about all those options. THanks for sharing them,
BennyCraigParticipant@200seriesJoin Date: 2017Post Count: 2
Thanks to all who have taken to time to provider this adviceRichard TaylorParticipant@qlds007Join Date: 2003Post Count: 12,024
Terry makes a number of good points.
We have seen dozens of borrowers who are unable to service for a new investment loan take a small equity loan on their own home / IP and invest in one of our Mortgage Trusts where they can get a Gross of Return of upto 9.09% Fixed with interest paid monthly.
They invest in the name of the lowest Taxpayer and use the surplus interest to repay their non deductible home loan debt.
We have ran a number of models based on say a $50K – $100K investment and the number of months saving is quite impressive.
Yours in FinancesinnersavedbygraceParticipant@sinnersavedbygraceJoin Date: 2020Post Count: 4
I was reading a list of must-read thread for beginners that Benny put together, and this article is one of them.
This is great! I have a question please sir. My question is why this option is not available – Refinance the old PPOR and use the cash from that refinancing to pay down the debt in the new PPOR?
AntonTerrywParticipant@terrywJoin Date: 2001Post Count: 16,213
That option is available, but the interest could not be deductible because it relates to a use which is non-income producing.