Am I able to do this?

[dr robbie ringo]

Here is our situation:

PPOR:
Value: 650 000
Owing: 143 000

We withdrew 190000 equity from our PPOR last year to buy an IP. We have used 100000 of that money (ie there is 90 000 sitting in the offset acount)

IP
Value: 440000
Loan amount: 380 000

In 18 months we will have paid off our PPOR and I'm wondering what my options are at that point. We will want to upsize. I estimate that we will need to spend approx. $900 000

Rather than sell and upgrade - I would like to keep my current PPOR and turn it into a rental property. I would then like to withdrawl the equity in my current PPOR to buy our next PPOR. Would this work for me tax wise?

I hope I have given you enough information..

thanks to anyone who takes the time to reply!

 

[alexlee]

Rather than sell and upgrade - I would like to keep my current PPOR and turn it into a rental property. I would then like to withdrawl the equity in my current PPOR to buy our next PPOR. Would this work for me tax wise?

Taxwise, no, because deductibility is based on the purpose of the loan. Therefore, if you borrow the equity from the PPOR to buy the next PPOR, then it will NOT be deductible.
Alex

 

[WinstonWolfe]

If you really are a doctor, I'd be interested in what vehicle your PPR title is in.
That will effect the transfer of that property into an IP.

 

[Pete]

doc,

There are possibilities, I believe. I can't advise on them; not my field. Suggest you speak to an accountant knowledgeable in this area. Melvin & Chan's "How to Legally Reduce Your Tax" book has easy-to-read simple examples that give some ideas.

Best wishes. Regards, Pete

 

[Qlds007]

There is nothing to stop you selling the property into a Trust Structure borrowing 100% of the Transfer value and using the raised funds as deposit for your new PPOR.

There are a few considerations as Stamp Duty will be triggered on the sale of the property to your Trust.

Depending on how long you intend to stay in the new PPOR and the numbers involved it could be well worth it.

Currently we probably finance a client a week doing exactly the same exercise.

 

[Bushy]

Until you work out what you are doing- stop paying off your home. put the money in an offset acc instead.
Bushy

 

[BayView]

Until you work out what you are doing- stop paying off your home. put the money in an offset acc instead.
Bushy

Why would he stop paying money off the PPoR loan?

He's already got $90k in the offset, that's enough ready cash for emergencies, and I would assume that the offset is already reducing the interest bill, so I believe he should continue to slam away at it.

The debt is not tax deductible, so it is better to clear it asap.

If he does transfer it into an IP, he will then have deductions from it, and even though there may be less loan interest, or maybe even none, this is an even better position.

With any luck, by the time he did it, the PPoR would be pos cashflowed.

No one even went broke making a profit

 

[Pete]

Why would he stop paying money off the PPoR loan?

He's already got $90k in the offset, that's enough ready cash for emergencies, and I would assume that the offset is already reducing the interest bill, so I believe he should continue to slam away at it.

The debt is not tax deductible, so it is better to clear it asap.

If he does transfer it into an IP, he will then have deductions from it, and even though there may be less loan interest, or maybe even none, this is an even better position.

With any luck, by the time he did it, the PPoR would be pos cashflowed.

No one even went broke making a profit

I think you miss Bushy's point of putting extra funds in the offset account? Sure, continue to 'slam away' at the loan - but put the funds in the offset account not directly off the loan. Then in the future there is the option if the house becomes an IP of withdrawing funds from the offset account, which is treated differently tax wise to if the funds are taken straight from the loan. I haven't explained that well but maybe enough to give the idea?

 

[Bushy]

L.A Aussie.
A little bit more info on what Pete said.
The money deposited into the 100% offset ac reduces the interest paid on the home loan exactly the same as if you were paying it down.

The benefit comes when you move and need money to buy your next home. If you use the money in your offset ac for the deposit the interest costs on your existing house loan will increase but it is deductable interest and you can claim it as an expense. Interest costs will rise by 140k x 8% = 11k per year, which will give you 4.5k py at 40% tax rate from the tax man.

If you payed the loan down instead your old home (now a rental) it would become cashflow + ,and you will now pay tax on it. And worse yet , the borrowed funds for your new house would need to be more (140k)and that loan would not be tax deductable because it is for a private purpose.

At the end of the day you will have the same amount of debt. But you will be able to claim more of the interest as an expense.


Hope it explains.
Bushy

 

[BayView]

L.A Aussie.
A little bit more info on what Pete said.
The money deposited into the 100% offset ac reduces the interest paid on the home loan exactly the same as if you were paying it down.
I know that. When I said "slam away" at it I was referring to it going into the offset, which was what you said you were doing currently. Why would you start paying down funds directly into the loan when there is a perfectly good offset sitting there? Doesn't make sense. I think I should have been clearer; it looks as though you misunderstood my terminology about where the money should be put. My fault; I'm too subliminal sometimes. It drives my wife mad.

The benefit comes when you move and need money to buy your next home. If you use the money in your offset ac for the deposit the interest costs on your existing house loan will increase but it is deductable interest and you can claim it as an expense. Interest costs will rise by 140k x 8% = 11k per year, which will give you 4.5k py at 40% tax rate from the tax man.
I know all this too.

If you payed the loan down instead your old home (now a rental) it would become cashflow + ,and you will now pay tax on it. And worse yet , the borrowed funds for your new house would need to be more (140k)and that loan would not be tax deductable because it is for a private purpose.
I know that too. Of course you would be using the funds sitting in the offset that you have been slamming away at.
The whole point of investing is to make money. What's the point of continually holding neg geared properties that cost you money and keep you a slave to a job? If I had 10 pos geared properties I'd be laughing; even after the tax bill.


At the end of the day you will have the same amount of debt. But you will be able to claim more of the interest as an expense.


Hope it explains.
Bushy

No offense, but after over 1,000 posts, don't you think I should be given a bit more credit for at least some knowledge?

My whole point was that your original post intimated that he should not pay any funds towards reducing the debt. Maybe we're both too subliminal?

In my opinion, this is not financially smart. People that advocate never paying down debt and instead just let time and rising property values offset the debt as the equity rises haven't seen too many unfortunate things happen in people's lives. It's delusional, and they are in denial that all will be fine.

You want to get the gap between what you are worth, and what you owe, as wide as possible, as soon as possible.

 

[redsquash]

There is nothing to stop you selling the property into a Trust Structure borrowing 100% of the Transfer value and using the raised funds as deposit for your new PPOR.
exercise.

Are you saying the person would borrow funds , at market rates from the trust .
Where is the advantage in that. The trust would just obtain a loan from the bank at market rates.
I don't understand , can you elaborate more clearly

 

[Bargain Hunter]

Here is our situation:

PPOR:
Value: 650 000
Owing: 143 000

We withdrew 190000 equity from our PPOR last year to buy an IP. We have used 100000 of that money (ie there is 90 000 sitting in the offset acount)

IP
Value: 440000
Loan amount: 380 000

In 18 months we will have paid off our PPOR and I'm wondering what my options are at that point. We will want to upsize. I estimate that we will need to spend approx. $900 000

Rather than sell and upgrade - I would like to keep my current PPOR and turn it into a rental property. I would then like to withdrawl the equity in my current PPOR to buy our next PPOR. Would this work for me tax wise?

I hope I have given you enough information..

thanks to anyone who takes the time to reply!

Hi,

It doesn't matter to the ATO where the equity comes from as there are no taxes or deductions on equity (except perhaps land tax).

So draw down the equity and use it as a deposit on your next PPOR.

I assume the PPOR is currently in your own name. If this is the case there are alot of costs involved in transfering it to a trust, or changing the title. Seek advice from a suitably experienced accountant about how to treat this asset.

If you ever sell the current PPOR you will get partial CGT consideration for the time it was your PPOR.

Regards

Andrew

 

[Dazz]

Until you work out what you are doing- stop paying off your home. put the money in an offset acc instead.

Agreed Bushy. Simon has been advocating this on the boards for years now.

 

[Bushy]

Hi L.A Aussie,

Did not intend to offend, Just wanted to open up the reasoning a bit to help the Doc and other newbees understand.

We will have to agree to disagree with paying off debt thou. At this stage I would prefer to add value to a property and put any cash available into a 100% offset ac or reno's. The gap between asset value and debt is similar but you have much more control and you can speed up the wealth creation. Just my thoughts and don't want to hijack this thread so I wont discuss it here - maybe a good idea for another thread if it hasn't already been done.

Regards Bushy

 

[DavidMc]

In my opinion, this is not financially smart. People that advocate never paying down debt and instead just let time and rising property values offset the debt as the equity rises haven't seen too many unfortunate things happen in people's lives. It's delusional, and they are in denial that all will be fine.

You want to get the gap between what you are worth, and what you owe, as wide as possible, as soon as possible.

As long as you can manage the cash flow, IMO the best way long term (20-40 years) to do this is to purchase increase your gross asset base rather than paying down debt.

Why won't it be fine?

 

[BayView]

As long as you can manage the cash flow, IMO the best way long term (20-40 years) to do this is to purchase increase your gross asset base rather than paying down debt.

Why won't it be fine?

If nothing goes wrong in your life, or rates go through the roof just after you get retrenched, or you are in a car accident and can't work for 12 months or worse, or you find out you're having triplets when you weren't planning on any more etc, then it will be fine. No problems.

But everyone seems to forget at the moment that properties don't keep going up in price exponentially forever. They have flat spots and can go backwards in lots of areas. You don't want to be in one when you are LVR'ed up around 90% or more like many people are, and then have to sell.

Not having a good buffer between what you own, what you owe, and what you would get if you had to have a quick sale due to a catastrophe is very risky in my opinion.

I'm not saying the "sky is falling"; I'm saying be prepared for anything.

 

[BayView]

Hi L.A Aussie,

Did not intend to offend, Just wanted to open up the reasoning a bit to help the Doc and other newbees understand.

We will have to agree to disagree with paying off debt thou. At this stage I would prefer to add value to a property and put any cash available into a 100% offset ac or reno's. The gap between asset value and debt is similar but you have much more control and you can speed up the wealth creation. Just my thoughts and don't want to hijack this thread so I wont discuss it here - maybe a good idea for another thread if it hasn't already been done.

Regards Bushy

No offense taken.

Putting money in the offset on a regular and consistent basis IS decreasing the debt as you say.

It's a good strategy

 

[DavidMc]

If nothing goes wrong in your life, or rates go through the roof just after you get retrenched, or you are in a car accident and can't work for 12 months or worse, or you find out you're having triplets when you weren't planning on any more etc, then it will be fine. No problems.

Yes, I agree it's important to have a good sized buffer. That's what I meant when I said 'manage the cash flow', however I should have spelt it out more. 'Manage the cash flow' for me on the purchase also least year meant fix my rates as my LVR was high, eliminating the rate risk. I also have various insurances to help reduce the loss of income risk (although I always wonder if my policy is worth the paper its written on). My girlfriend is increasing her dose of the pill this week, that should also help reduce the pregnancy risk.

But everyone seems to forget at the moment that properties don't keep going up in price exponentially forever.

I totally agree. If you require properties to have CG to survive then you're asking for trouble. Every time I buy I ask myself 'will I be happy if the price does nothing for 5 years'. If the answer is yes then I proceed.

Not having a good buffer between what you own, what you owe, and what you would get if you had to have a quick sale due to a catastrophe is very risky in my opinion.

I totally agree with this. What I didn't agree with is paying down debt. It's only a small point however I think it's best to leave the debt as it is and save up a buffer in an offset account.