PPOR -> IP or IP -> PPOR

Hi Guys,

Ill try to be as quick as I can. I bought a house in 2003. Recieved FHOG and still had to pay stamp duty. Does the fact that I receieved the FHOG qualify that house as my PPOR even though I have only lived in it for the first 6 months?

Also now I am buying a second IP. What do I need to do with the first PPOR? The first property I bought is what is called "negative equaty". I spent around 370 acquiring it. Its now worth 320K and I have 300 owing.

The 2nd property has good potential and is more promising in terms of CG..

Can i transfer PPOR to 2nd IP or can i make them both IP properties.

I guess im asking for direction here as I dont know what the best way to do it is.

Thanks

Hi TigerGT,

Where are you living now? Your first property can be converted to an IP if you are not living there anymore. You aren't in breach of the FHOG as you lived in it for 6 months. Both properties can by IP's, presuming you're not living there.

Cheers,
Jen

Hi JenD,

No i am not living in either of them. I am currently renting at the moment. Should I specify one of them as a PPOR untill I do eventually buy my own PPOR? Is it better tax wise??????? (unsure). Or is it just smarter to specify them both as IP's?"

Hi TigerGT,

Unless you're planning on selling your original PPOR - I don't think there would be any tax benefit in claiming them as your PPOR if you're not living there - and even then, you'll have 6 years before having to pay CGT and you can always move back in within 6 years. The interest you pay on your loans will not be tax deductible for any property which is your PPOR. If you're renting yourself - I imagine you'd be wanting to rent our your properties? Then they become IP's, the rent coming in becomes income, and all the expenses (interest, rates, maintenance, body corp, depreciation, etc, etc) becomes tax deductible.

Cheers,
Jen

Yes, That is the plan. To rent both out. Acquire more. rent them out too. Acquire more. rent them out too. Wait for a boom (5-10 years in my opinion). Sell a few. Buy PPOR, borriwing close to nothing for it too, and hold onto the other IP's I still have whilst acquiring more IP's.

Aim : only 10 IP's

Thanks Jen for the clarification

Claiming PPOR (whether normally or under the 6 year rule) is beneficial only for the CGT and land tax exemptions. If you don't plan to sell, it's not a big deal.

I wouldn't be too stuck in stone about the 'I'm not buying a PPOR anytime soon', though, Tiger. Things change. I didn't want a PPOR 3 years ago: I thought I was going to stay overseas for another 10 years and keep buying IPs. Now I'm looking at furniture shops and saying 'I want THIS for my living room!'.

Things change. Set up your finances for maximum flexibility. e.g. in my case I don't have an offset account on any of my loans so I keep spare cash in my ING account. I lose a bit of net interest but it means I can eventually plunk the deposit for my PPOR and not lose tax deductibility on my IPs.
Alex

e.g. in my case I don't have an offset account on any of my loans so I keep spare cash in my ING account. I lose a bit of net interest but it means I can eventually plunk the deposit for my PPOR and not lose tax deductibility on my IPs.

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: Alexlee

Alex, If i can ask, i dont really understand this. If you were to take all the money(ING Savings for eg) out of your offsett then your tax deductibilty will increase as you will be paying more interest after withdrawing from the offsett. This would increase expenses on the property wouldnt it(interest)?
thanks alexlee

tigerGT said:

Alex, If i can ask, i dont really understand this. If you were to take all the money(ING Savings for eg) out of your offsett then your tax deductibilty will increase as you will be paying more interest after withdrawing from the offsett. This would increase expenses on the property wouldnt it(interest)?

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Say I have a $200k mortgage and 50k cash in ING. Now I pay interest on (effectively) only $150k because $50k is 'offset'.

I then take the $50k out to buy a PPOR. Now I pay interest on the $200k IP mortgage (excluding PPOR debt) but all of that is deductible.

Contrast that with:
I have a $200k IP mortgage with no offset. I deposit the $50k cash into the mortgage so it's now $150k. I pay interest on that $150k (all deductible.)

I then redraw the $50k out to buy a PPOR. Now I pay interest on $200k BUT only $150k is deductible. $50k is not becuase I used it for private purposes.

Since I don't have an offset on any of my loans right now, I can't use option 1. So I 'mimic' an offset account by having a ING high interest account (hence my analogy why an offset account is really just a high interest account). Just to ensure that I maximise deductions on interest (i.e. making sure as much of the interest I'd have to pay anyway is tax deductible).
Alex

Ahhhhhhhhh I understand
So your comparing your ING to an offset but its just not directly related ... to the your loans that is but it does "offest " it.. It is still advantageous to have the offestt though as opposed to a redraw..
I think anyway from a tax perspective

tigerGT said:

Ahhhhhhhhh I understand
So your comparing your ING to an offset but its just not directly related ... to the your loans that is but it does "offest " it.. It is still advantageous to have the offestt though as opposed to a redraw..
I think anyway from a tax perspective

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An offset is better than a redraw especially if you plan to use the money to buy something non-deductible (PPOR, for example). If I planned to use that money to buy another IP, I would put it into the loan and redraw it and not lose deductbility. However, since my next purchase is likely to be my PPOR.....

My ING account pays 6%, and my mortgage is 7%. So because it's not a true offset account I lose 1% in interest a year. The accounts are unrelated except that my name is on both of them. On my tax return, I receive 6% interest and pay out 7% interest. If it was a true offset I would be getting zero interest and paying less.

I'm still thinking about how I should structure my PPOR loan. Offset would be nice but if I use the offset balance to buy shares I don't get deductibility (because the loan is still 'used' to own my PPOR). Maybe a split loan.
Alex

Hi Alex,
Either I am totally missing something or I think I am looking at this differently than you are.

An offset is better than a redraw especially if you plan to use the money to buy something non-deductible (PPOR, for example).

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Alexlee

I believe an offestt is better because you can redraw from it to buy another IP and still negative gear whats remaining in the linked mortgage. i.e with an offset I can take out the money, buy a car, and then I can negative gear the extra interest incurred. With a re draw I can not do this as I need to prove that the redraw amount was for house improvements etc....

I think im missing something really small here. Either that or I just dont agree with that theory. Either way i hope I am not getting under your skin. Im sooo baffled here. I mean i know how both these products work really well I just cant see how the offsett will help you buy a PPOR?

IS it because (WHAT I THKINK IM GETTING IT) the money that you are using for your PPOR is now becoming an extra tax deduction... When taking out from offsett for PPOR you have effectively borrowed from the IP, interest repayments for IP are increased and you can negative gear IP which in turn means that it is helping you pay for your PPOR.

???

Thanks alexlee

you are soooo patient

tigerGT said:

Hi Alex,
Either I am totally missing something or I think I am looking at this differently than you are.

I believe an offestt is better because you can redraw from it to buy another IP and still negative gear whats remaining in the linked mortgage. i.e with an offset I can take out the money, buy a car, and then I can negative gear the extra interest incurred. With a re draw I can not do this as I need to prove that the redraw amount was for house improvements etc....

I think im missing something really small here. Either that or I just dont agree with that theory. Either way i hope I am not getting under your skin. Im sooo baffled here. I mean i know how both these products work really well I just cant see how the offsett will help you buy a PPOR?

IS it because (WHAT I THKINK IM GETTING IT) the money that you are using for your PPOR is now becoming an extra tax deduction... When taking out from offsett for PPOR you have effectively borrowed from the IP, interest repayments for IP are increased and you can negative gear IP which in turn means that it is helping you pay for your PPOR.

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Hi TigerGT,

You're not missing anything, you're right on track. If you have an offset account against an IP - you can withdraw the funds for whatever you like (investment, personal, etc) and the increased interest you pay on the IP loan remains entirely tax-deductible. If you have IP's and are saving up for a PPOR, keeping your excess funds in the offset account and then pulling them out for a large deposit on the PPOR means all the interest on the IP will be tax deductible.

If you have an offset account against your PPOR - no matter what you pull the money out for, it won't be tax deductible. But you can pull the money out for personal reasons without having to refinance which can make things easier. Also, if you decide you want a different PPOR, you can easily turn the existing PPOR into an IP and use the funds for the new PPOR and the entire interest on the old PPOR turned into IP will be tax deductible.

If you, instead of using an offset account, put funds into the IP and then redraw or get a LOC - the interest on the LOC or redraw will only be tax deductible if you use the funds for investment.

If you, instead of using an offset account, put funds into the PPOR - you can redraw the funds or get a LOC to put down a deposit on an IP and the interest on that part of the loan will be tax deductible.

Hope that helps!

Cheers,
Jen

If you use the money for income producing purposes, either an offset or a LOC will do just as well. It's all deductible but with different splits.

1) Start with $200k 6% IP mortgage. $12k deductible interest. I get $50k from somewhere, and deposit it into the mortgage. Now I only have a balance of $150k and deduct 9k from tax.

I then redraw $50k to buy a $50k IP (for simplicity's sake). My total debt is $200k. $150k (9k interest) is deductible against IP1 and $50k (3k interest) is deductible against IP2.

2) Start with $200k 6% IP mortgage. $12k deductible interest. I get $50k from somewhere and put it into an ING account also paying 6%. I have income of $3k, interest of 12k. Net 9k.

I then take the $50k from the ING account and buy a $50k IP. My total debt is $200k. The whole $200k (12k) is deductible against IP1. For tax purposes IP2 has no debt against it.


That’s fine if you’re buying more IPs. Is there a tax difference where the PPOR deposit comes from an offset, or a LOC redraw?

The answer is yes. The key being as you said: DOES THE DEPOSIT REPRESENT A NEW FURTHER BORROWING AGAINST THE IP?

In the case of an offset, no it is not a further borrowing. The whole IP interest then becomes deductible.

In this case:
3) Start with $200k 6% IP mortgage. $12k deductible interest. I get $50k from somewhere, and deposit it into the mortgage. Now I only have a balance of $150k and deduct 9k from tax.

I then redraw $50k to buy a $50k PPOR. My total debt is $200k. Only $150k is deductible. $50k is not because I borrowed it against the IP for private purposes.

4) Start with $200k 6% IP mortgage. $12k deductible interest. I get $50k from somewhere and put it into an ING account also paying 6%. I have income of $3k, interest of 12k. Net 9k.

I then take the $50k from the ING account and buy a $50k PPOR. My total debt is $200k. The whole $200k is deductible because the whole $200k was 'used' to buy the IP and the bank is now charging me full interest.


Actually, what you're doing when withdrawing from an offset and buying a car is NOT deducting interest on the loan you took out to buy the car. All you're doing is use money held in a separate account (which your bank said they will not pay you interest on and will 'offset' your mortgage interest instead).

It's easier to think of your offset as just a separate high interest account and the bank is saving on paperwork by not paying you interest and taking it back again. Or that the bank gives you a ‘discount’ on your mortgage interest in return for not paying you interest on the offset account. The key is that the mortgage amount and high interest account balance are SEPARATE for tax deductibility purposes so the 'purpose of funds' rule doesn't come into play when you use the amount in the high interest account.
Alex

WOW
Thats awesome guys.

Thanks, I fully understand what you are saying now ALexlee. Little misunderstanding there. Well If this thread doesnt answer any questions regarding the difference between offsets and redraws then I dont know what will!

Thanks.
Very helpful

alexlee said:

The key is that the mortgage amount and high interest account balance are SEPARATE for tax deductibility purposes so the 'purpose of funds' rule doesn't come into play when you use the amount in the high interest account.
Alex

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I think the other key with using a high interest account (I'm talking about something that you have immediate access too - not a long term deposit or anything) - while the interest rates are high, they are not higher than your loan interest rate. And you will end up losing money if you put your money into one of these higher interest accounts instead of an offset.

Example:

You have $50k - put into your IP offset account or cash managent account? Assumption: Cash management account - 6.5% interest rate (and that's higher than most i've seen), loan 7.5% interest rate; you're on highest income bracket (45%)

Put into offset account:
50k X 7.5% interest = $3,750 savings/yr on interest

Put into cashmanagent account:
50k x 6.5% interest = $3,250 income
less interest you paid ($3,750) = loss of $500
plus tax-deduction: $500 x 45% = $225 tax return
$500-$225 = Loss of $275

If your tax-rate is lower %, you will lose even more. Unless your cash-management account has an interest rate equal to or higher than your loan interest rate, you'll lose money.


Cheers,
Jen

I agree, Jen. At the moment my problem is that I don't have an offset account. So I have to make do with an ING account. I lose about 1% of the balance a year.
Alex

JenD said:

Hi TigerGT,

If you have an offset account against your PPOR - no matter what you pull the money out for, it won't be tax deductible. .....

If you, instead of using an offset account, put funds into the PPOR - you can redraw the funds or get a LOC to put down a deposit on an IP and the interest on that part of the loan will be tax deductible.

Hope that helps!

Cheers,
Jen

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Can anyone explain why using funds from the PPOR offset account for a deposit on an IP would not make interest on this part of the loan tax deductible, whereas redrawing from the PPOR for a deposit would?

If I redraw all my funds out of the PPOR to use a deposit to buy a new PPOR and then convert the old PPOR over to an IP, would I be able to claim interest tax deductions on the full loan amount?

Does transferring funds between a PPOR offset and redraw affect the interest tax deductions of a IP loan? e.g. If I had funds in a my PPOR redraw, I then pushed those over to my offset account, in the future I decide I need to use the funds in the offset for a IP deposit, so I push the funds into the loan and redraw the funds I need for the deposit.

Mos.

Mos said:

Can anyone explain why using funds from the PPOR offset account for a deposit on an IP would not make interest on this part of the loan tax deductible, whereas redrawing from the PPOR for a deposit would? .

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Hi Mos,

The loan is against the PPOR and the purpose of it was to purchase the PPOR. The offset account is not a loan - it is simply a savings type account attached to the loan which offsets the amount of the loan you pay interest out. Pulling money out of your PPOR offset account to use as a deposit on the IP is not creating a new loan, the purpose of the original loan was PPOR so not tax deductible. (If funds were placed into PPOR loan account and then redrawn, this is creating a new loan which purpose is for investment, so redraw part of loan is tax deductible).

If you took funds out of IP offset account to purchase PPOR (or go on a holiday, or buy a toy, - any reason whatsoever) - the interest on the loan is tax deductible because the purpose of the LOAN is for IP. If instead you put those funds into the IP and then redrew them for any reason that is not for an investment - that interest on the redraw would NOT be tax deductible as the purpose of the LOAN is not investment.

Hope that helps!

Mos said:

If I redraw all my funds out of the PPOR to use a deposit to buy a new PPOR and then convert the old PPOR over to an IP, would I be able to claim interest tax deductions on the full loan amount? .

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No. The interest on the amount you redrew to purchase new PPOR would not be tax deductible. The interest on the remaining part of the loan (which was for purchase of original PPOR converted to IP - so the purpose of that loan is now for IP) IS tax deductible.

Mos said:

Does transferring funds between a PPOR offset and redraw affect the interest tax deductions of a IP loan? e.g. If I had funds in a my PPOR redraw, I then pushed those over to my offset account, in the future I decide I need to use the funds in the offset for a IP deposit, so I push the funds into the loan and redraw the funds I need for the deposit.

Mos.

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It would depend on how you did it. If you redrew funds to put into a PPOR offset account - interest would not be tax deductible - loan is not for an income producing investment. If you had funds in your PPOR offset, then put them into your PPOR loan and then redrew them to buy IP - interest would be tax deductible is for income producing investment.

Interest deductibility is ALL about what the PUROSE of the loan is - not where the money comes from.

Hope that helps a bit!!

Cheers,
Jen

JenD said:

(If funds were placed into PPOR loan account and then redrawn, this is creating a new loan which purpose is for investment, so redraw part of loan is tax deductible).

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Hi Jen,

Thanks for taking the time to reply to my questions, I am beginning to understand a bit more about how to ensure I can obtain the maximum tax deductions for interest on my IPs in the future.

One question I have is regards to your reply:

I am still a bit hazy by this section in your reply "creating a new loan". Do you mean that when I redraw out of the PPOR loan I am in fact borrowing from the PPOR?

Also I have one other scenario that you maybe able to provide an answer to:

If I wanted to say buy an IP for 300k, let's say I provide the deposit from my PPOR offset of say 10k (not tax deductible), but I take out loan for 320k (100% loan + costs) ie. 300k + 20k for legals etc. and therefore on settlement I have a 320k loan but have 10k in the IP offset of surplus funds due to the deposit I had prepaid.

This in my view would allow me to claim interest tax deductions on the full 320k loan as it's a new loan for investment purposes, and therefore the 10k non tax deductible deposit would not be an issue. Is this right?

Mos.

Mos said:

Hi Jen,

One question I have is regards to your reply:

I am still a bit hazy by this section in your reply "creating a new loan". Do you mean that when I redraw out of the PPOR loan I am in fact borrowing from the PPOR?

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Hi Mos,

You are redrawing against the equity you have in your PPOR, so yes, you are borrowing from your PPOR - but the purpose of this part of the loan is for a deposit on an IP, so it's deductible.

Mos said:

Also I have one other scenario that you maybe able to provide an answer to:

If I wanted to say buy an IP for 300k, let's say I provide the deposit from my PPOR offset of say 10k (not tax deductible), but I take out loan for 320k (100% loan + costs) ie. 300k + 20k for legals etc. and therefore on settlement I have a 320k loan but have 10k in the IP offset of surplus funds due to the deposit I had prepaid.

This in my view would allow me to claim interest tax deductions on the full 320k loan as it's a new loan for investment purposes, and therefore the 10k non tax deductible deposit would not be an issue. Is this right?

Mos.

Click to expand...

When you have funds in your offset account - you are offsetting against the loan, so if you have a 320k loan and 10k in your offset - you are only paying interest on $310k and so only 310k is tax deductible. If you take that 10k in your IP offset and move it into your PPOR offset, the full $320k IP loan is tax deductible. (Remember - your offset account is not a loan, so you can use those funds for whatever you like and the interest you pay on the remaining part of the loan against the IP is tax deductible as the purpose of the LOAN was for the IP).

Hope this helps!

Cheers,
Jen