Current PPOR to IP

[kelvinh]

I have a PPOR which im about make into an IP… value approx 230k… owing about 140k….

Should I refinance and withdraw my equity so my tax deducatble loan is maximised?? the current repayments on the propety is quite comfortable.(fixed loan at 5.99%)

Im living in my partners home till we buy one together… I would like to buy another IP soon… and also a PPOR with my partner in about 1yrs time.

Not sure what is normally done... or what might see me better off down the line??

Thanks in advance…


Kelvin

[Les]

G'day KelvinH,
Should I refinance and withdraw my equity so my tax deducatble loan is maximised??
I would've thought that depends on what you spend the extra Equity loan proceeds on. e.g. if it is for your next PPOR, then it's NOT deductible (to my knowledge). If you spend it on a trip around the world....... well .... NO!

Or, is it the deposit/costs for your NEXT IP???? DO check it out with your favourite Accountant. I'm not one of them, BTW - so this is just my opinion.

Also, check out the Q&A section of the Somersoft site (outside of these forums) as Jan has added some thoughts there re this subject. (Just go back to www.somersoft.com and look for Q & A section....)

Regards,

[XBenX]

Hey KelvinH,

If you want to maximise your deductible interest your withdrawals would have to be for investment purposes...

Cheers,

XBenX

[Rolf Latham]

Hiya

The only "legit" way in my memory is to sell the place into a trust, pay stamps, and thereby release up to the balance of 95 % of the property value as a deductible loan, putting cash into your hands for next PPOR

ta
rolf

[alwayscurious]

I asked the same q to my accountant.

It's the "Final use" of the money that counts.

I countered with "what of a trust?"

he said:
Even through a trust, through a company, filtered through offshore and back again.

If you use the money you borrowed for non-tax deductible purposes, legally, it's not tax deductible.

Pooh eh?

But never fear - it still could be worth it. Just figure out how to juggle it around.

[see_change]

I asked the same q to my accountant.

It's the "Final use" of the money that counts.

I countered with "what of a trust?"

he said:
Even through a trust, through a company, filtered through offshore and back again.

If you use the money you borrowed for non-tax deductible purposes, legally, it's not tax deductible.

Pooh eh?

But never fear - it still could be worth it. Just figure out how to juggle it around.

Along with Rolf ,my understanding is that you can do it , if the trust buys the property off you , at a realistic value, and you borrow the money through the trust. The borrowing in the trust then become tax deductable against the rental income in the trust. If you use a hybrid trust then you can make it deductable against your taxable income ( or so I understand ).

See Change

[kelvinh]

Oh I see I thought its as simple as taking out the equity in the existing house… before it become s a rental… and then refinance the PPOR to max value and then start renting it out…

Oh how wrong I was…

[MichaelW]

Kelvin,

I went down this rabbit hole too some time back. I've got an IP worth $100K with NIL borrowings against it, and a PPOR still owing $200K. It would be nice to turn half of that non-deductible debt in to deductible debt but I don't think its possible without selling to a trust or some such. And that incurs taxes of its own...

Cheers,
Michael.

[not a sheep]

CGT , Tax and Trusts VS Individual Owner.

At present your PPOR is not subject to cgt if you were to move out of dwelling and rent to someone else. (Limited to 6 years per period you are not living in dwelling). Note you are also limited to one PPOR at any one given period for mr Tax Man.

If you sell your asset to a Trust, as I understand there is no CGT exemption when or if the trust sells the asset at a later date. (Should still be able to keep the 50% discount on CGT if held in excess of 12months though).

Just to keep the wheel spinning

Regards,

NAS

[kage322]

KelvinH,

I've probably come in here a little late, but for what its worth I had a similiar situation that I have just overcome.

I have very recently completed a transaction of a former ppor into a HDT. Of course I was very fortunate to have a broker who understood what I wanted to achieve. I'm sure Ed Nixon @ Loans Approved won't mind me dropping his name.

First stage did lots of research and sums set up HDT. Spent lots of time lerking on this forum other research aswell. Yes some CGT, stamp duty etc...but short-med & long term wil be MUCH better off.

Without going into specifics, situation not long ago was: current ppor BIG debt, IP (formally our ppor) all paid off. Situation now; PPOR debt free. IP now not cross collateralised and with stand alone debt ~80% and draw down balance from ppor's instant equity (no security for that amount).

So, it can be done, and it has been done! I might add with help and an undersatnding team (wife! and broker).

cheers!

[alwayscurious]

Along with Rolf ,my understanding is that you can do it , if the trust buys the property off you , at a realistic value, and you borrow the money through the trust. The borrowing in the trust then become tax deductable against the rental income in the trust. If you use a hybrid trust then you can make it deductable against your taxable income ( or so I understand ).

See Change

See Change, Rolf - you are correct!

I was attempting to undscore XBenX's comments with this:
If the final use of the borrowed money is for income producing purposes, it is tax deductible.

Not if you turn around and buy another PPOR with the borrowed money, or spend it on hats, etc.

The original aim of this discussion is to turn the PPOR property into an IP.
Secondly want to turn the outstanding borrowings interest into tax deductible.

thirdly, may want to make the borrowings against the PPOR up to the max allowed by bank, (Say 80% of PPOR value for arguments sake). (assuming a negative gear scenario)

Points 1 & 2 can be covered if you simply move out, and rent it to someone else.
Interest on outstanding mortgage becomes tax deductible from the date it was available for rent.

Points 1 & 2 & 3 can all be done, but a sale is needed.

Either:
Sell the PPOR at market value to the high taxed partner and most probably negative gear it in their name only.
A new loan is taken out in this person's name for the amount of money needed. The interest on the loan is tax deductible.

You have to cop the stamp duty, sales tax etc though!
Then rent it out.

Or
Sell the PPOR to a trust for market value.

(You can lend the trust money that you go and borrow from the bank, by buying unit shares in the trust, tax deductible against your own income)

Cop the stamp duty etc.
then rent it out to the market, at market value.

The interest is tax deductible.

Special case: Can the trust rent it out to yourself???

(Heck, I reckon you'd be a good tenant!)

I asked the accountant and he smiled woefully and said - straight up and down? not really. this could be construed as TAX AVOIDANCE.

ATO apparently look at this very closely, then look again, then again, even closer. then they ask lots of questions.

The deal is they don't allow any type of transaction as a tax deduction if it's done for the pure purpose of avoiding tax.

However.
IF.. BIG IF...

I think if the following scenario was in place. (disclaimer, disclaimer, not an accountant, test it yourself etc etc)

a) hybrid trust was set up with trust deed expressly stating the purpose of the trust (including asset protection)
A history of asset protection actions was put in place...

b) other IP's put in the trust for asset protection purposes,

Then, some time later...
c) your own home SOLD to the trust for asset protection purposes

d) You then need somewhere to rent - you may rent off the trust - any of the IP's that are vacant.


The end result?

Asset protection:
You don't end up with any assets in your own name.

PPOR is turned to an IP and ensures tax deductible interest.

IP is rented out at market rate to the market - perhaps even yourself.

BUT you'd have to have DAMN good substantiation, a paper trail that is squeaky clean, and be able to stand up to any type of auditing.

My accountant reckons if you.

a) set up a trust
b) sold your PPOR to it.
c) rented it straight back off the trust

you'd be up for an audit before too long. This looks like tax avoidance to the ATO.



So:
take any of the above options.
A) turn the existing mortgage interest tax deductible by moving out & renting out.

B) sell it to another entity (HDT or something) & turn the maximum amount possible to tax deductible.

Looks like Kage332 took option B. Will be getting a PM from me to find out more about HOW! Because I want to too.. :)