PPOR to IP Loan Structure - Tax Deductable?

Hello,

I tried using the search function but it wasnt working for me unfortunately so i apologize if this is covered elsewhere.

Scenario:

3 years ago I bought a unit as my PPOR and now I am changing it to an IP and moving elsewhere. The homeloan allowed unlimited redraw and so the home loan basically became my bank account with my pay going into it and living out of it to reduce the interest as much as possible. In the next 6 months I am going to use that excess capital to purchase a second property.

I recently spoke to an accountant friend and he mentioned there might be some difficulty with using that account to claim the interest as tax deductable on the IP.

I looked around but could only find this information pertaining to the loan itself on the ATO website: http://www.ato.gov.au/individuals/content.asp?doc=/content/00113233.htm

You can't claim interest:

on the portion of the loan you use for private purposes (for example, money you use to purchase a new car or invest in a super fund),

and it gives an example

Example: Claiming part of the interest incurred

Yoko takes out a loan of $400,000 from which $380,000 is to be used to buy a rental property and $20,000 is to be used to buy a new car.

In my instance the loan was soley for the purchase of the unit.


So this leads to my question

1 - Will the way the account is set up affect my ability to claim the loan interest as a tax deduction on the IP?

I might just be being pedantic and paranoid but I want to ensure I am doing everything correctly and receive as much as I am legally entitled to.

Thanks in advance for your help and for reading my long question

Yes you have a problem.

You see every time you withdraw from the account it is considered new borrowings. So the claiming of interest on each new withdrawal will depend on what the withdrawn funds were used for. Sounds like you used it for living expenses so you could have a very large loan with little if any of the interest deductible.

If only you had used a 100% offset account.

well that sucks, thanks for the heads up though. When I started the loan I looked at an off set loan but was advised that there was little difference and so I chose the redraw as it was easier than having to remember to transfer the money into the account every month.

Ahh well, lives and learns

I guess I need to immediately stop any transfers going into that account to 'stop the rot'

Would refinancing (maybe to interest only) the loan 'reset' the deductable interest? or would the % of loan used on the IP and % used on expenses transfer to the new loan?

Hi MM



You arent paranoid...............you possibly have a bigger problem than you think.

While your remnant debt might be x, that x may not be deductible either, because every time u made a redraw, that was a non ded purpose, and everytime u paid money into the the loan it repaid principal

Might make for some interesting maths to work out what is deductible

Once again, not picking on anyone, but those reading this post..........take note that the right loan and stucture has little to do with rate.

Whoever set the loan up needed to only ask ONE question..........will you die in this property ?

Moving fwd, depending on the dilution, selling the asset and realising the gain might be the easiest soln and then start from a clean slate ?

ta
rolf

Rolf Latham said:

Might make for some interesting maths to work out what is deductible

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Out of interest, Rolf or accountants out there, how would you work out the amount that is deductable?

Would you need to go through each transaction ever made, apportion the investment Vs personal funds, calculate the interest of that proportion between each transaction, then add? Not sure if that really made sense

It would be extremely difficult to work out.

Take the example of a $100,000 loan. IO

Week 1 $2000 is deposited, balance is $98,000. Deductible portion is $98,000
Then $1,000 with withdrawn to buy groceries. deductible portion is $98,000 but balance is $99,000

Week 2, $2000 deposited and $1,000 withdrawn. Balance is $98,000 but only $96,000 is deductible.

Week 3 $2,000 in $1k out= $97,000 balance but $94,000 deductible.

Then interest is added. Say $500. How much of this is deductible??
In week 1 98% of it would be.
In week 2 96% of it would be
in week 3 94% of it would be

Imagine trying to work it all out after a few years. Even worse with a PI loan too.

Actually I think my figures are not accurate, but that is the general gist of it.

Since I am now changing it to a PI would I simply be able to tally the amount withdrawn over the PPOR years?

EG

Loan 200k, over 3 years 100k withdrawn out of the loan, tax deductable portion from 'right now' is 50%? (assuming no more $$ comes out of the account)

MangoMadness said:

Since I am now changing it to a PI would I simply be able to tally the amount withdrawn over the PPOR years?

EG

Loan 200k, over 3 years 100k withdrawn out of the loan, tax deductable portion from 'right now' is 50%? (assuming no more $$ comes out of the account)

Click to expand...

Not really as there is interest to be taken into account too. How good are you at excel spreadsheets???

Terryw said:

Not really as there is interest to be taken into account too. How good are you at excel spreadsheets???

Click to expand...

Ahh I see, so I would need a day to day running total identifying and allocating a % of each interest payment to the loan and to other costs.

Actually could I do it month to month, even though it would be less accurate it would be fudged in favour of the ATO and save a hell of a lot of work

Sounds like a bit of a challenge

I wouldnt risk it, the loan has been highly diluted and the ATO may simply rule that the "nexus" (ability to easily determine personal/investment) has been lost. This would be financially ruining if they disallowed the interest claim for the last 5 years, 5 years down the track!

Your learning the same lesson I learnt. Got a redraw for the ease of it, & because I wasnt aware when buying at the age of 20.

So, you have a big loan, none of which you can claim against rent. In my opinion, unless it had a LOT of equity to redraw as a deposit for an IP, it is either the option of sell & start fresh with the realised gains, or stay there & buy and IP using the Equity in your PPOR.

Mango, i've found myself in the same boat

http://www.somersoft.com/forums/showthread.php?t=65730

Like you, a hard lesson.....but well learnt.

We've decided to use the Equity in our PPOR and buy an IP, and then evaluate our next move in a few years.

Unfortunately I cant continue using it as a PPOR due to the lack of space (growing family), we have actually moved out of it and are currently renting for 6 months to settle it down into a rental pattern before buying a PPOR, I guess that needs to be revised

Luckily it is a small loan with high income. After a quick calculation using only basic deductions it is only -$900/year without being able to claim the interest.

I have also just signed a long term lease on the unit at a great rate so maybe that would help if I chose to sell it off and start again

Hrm, something to think about, thanks for the advice and opinions guys

Hi MM

900 a year on the IP side of the balance sheet, but ?? on the new PPOR side

ta
rolf

Rolf Latham said:

Hi MM

900 a year on the IP side of the balance sheet, but ?? on the new PPOR side

ta
rolf

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Not sure what you are saying, i think you might be saying that I dont have a PPOR and I am renting so I am back to square 1 with no capital because my deposit is tied up on the IP.

if i take say 50k out as a deposit on a PPOR the ip will cost me another 2kish a year making it less attractive.

I think i need to investigate the deductions more closely, the body corp has spent a whole lot of cash in the last year with a new lobby and 500k air con unit so maybe the deductions from that will sway the answer

What will happen If MangoMadness change his lender now which offers 100% offset, live in the property for another 3-4 years and then rent it out. Will he be fine with tax deductibility then?

amsaini15 said:

What will happen If MangoMadness change his lender now which offers 100% offset, live in the property for another 3-4 years and then rent it out. Will he be fine with tax deductibility then?

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Deductibility still depends on what the borrowed funds were used for.

amsaini15 said:

What will happen If MangoMadness change his lender now which offers 100% offset, live in the property for another 3-4 years and then rent it out. Will he be fine with tax deductibility then?

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Mangomadness could do this & live in the property for 15 years but this still wont change anything, apart from the fact that more of the loan could be paid off.

Deductibility is based on the original loan for the purchase of the property(plus loans for reno's etc). Seeing as though the original loan is tainted, then the same result eventuates. Time doesnt change too much, just like CGT, you still have to know/prove what you paid for the house 25 years ago for your cost base.