Borrowing against PPOR to turn it into an IP

[Bec123]

Hope this question isn't too basic for you guys. My parents have bought a new property which will be their PPOR. They want to rent their current PPOR for couple of years until the market improves. The current PPOR is fully paid off. Can they re-mortgage it to negative gear it?

Thanks for any advice.

 

[Bill.L]

Hi all,

This has got to be the single most asked question/statement about property investment, and I don't just mean on this forum.

As all the accountants will tell you, it is the purpose of the borrowed money that determines the deductability of the interest.

Buying a PPOR is a private expenditure, buying an IP is an investment.

Therefore buying the new house for PPOR, will not produce the negative gearing looked for.

In this instance, my opinion is the law is floored, where two situations that are the same, have different tax deductability.

Situation 1. Family buys and pays off PPOR, then borrows against equity to buy IP.
outcome 1 PPOR and 1 IP, and negative gearing.

Situation 2 Family buys and pays off PPOR, then moves to new PPOR with borrowings against 1st home, that then gets rented out.
outcome 1 PPOR and 1 IP, and no negative gearing but a higher tax bill.

The law is an ***, but it is still the law.

bye

 

[Tasman]

Hi Bec,
Simply and wholly depends on the usage of the loan funds. If the loan funds are used for an investment purpose, then they are tax deductable, otherwise they are not deductable.

The type of security used for the mortgage is irrelevant. So if your parents say borrow against the IP to invest in shares or a second IP then they are deductable. However if they used the funds to reimburse a loan taken to purchase the PPOR then the loan interest is not deductable.

Bill L, I don't agrree that the law is ***. How simple is it to comply with the above tax ruling if you understand it before you take action. However people involve themselves in expensive transactions and then ask about the tax implications after the event, not a very logical way of looking after your financial affairs.

What you are suggesting is the law looks at the fairness of results, and not the process. This is horrendously difficult and impractical to implement, and that is why law/regulations sometimes appear unfair.

 

[alexlee]

Bec123, check this with your accountant, but as the others have said, if the PPOR is already fully paid off, re-mortgaging it to buy the new PPOR means the loan is NOT deductible.

In this particular case, one suggestion might be to sell the property, get the money (no CGT) and buy the new PPOR. Then refinance the new PPOR and buy another IP with it. If your parents think the market is bad now and will turn up, then they will be buying the new IP in the current down market as well.

Of course this is a very emotional topic for for tax reasons this would be better than just buying a PPOR with no tax deductibility. Especially if the new PPOR will be similar in price to the old one.
Alex

 

[Qlds007]

Bec

It is funny i recon i have 15 clients over the last 60 days all in the same position and have asked the same question.

Many clients realise that the MB or Bank have structured their PPOR loan incorrectly and they loose the benefit of the Interest Tax Deduction.

Depending on the numbers they could look at selling the property to a Trust which they set up and then the total amount of the month interest on the new loan becomes fully tax deductible.

Yes they have to pay Stamp Duty in Qld on the Form 1 Transfer value but this can still work out to be of benefit depending on their long term goals and aspirations.

For many clients it is a worthwhile exercise.

 

[Mry]

Yes they have to pay Stamp Duty in Qld on the Form 1 Transfer value but this can still work out to be of benefit depending on their long term goals and aspirations.

For many clients it is a worthwhile exercise.

For most of my clients, the amount you pay in stamp duty from making the transfer happen is made up in tax refunds within 1.5 - 2 years. So all the extra refunds you make after that period is all yours!

 

[tubs]

I dont necessarily agree with all this. I believe that if you borrow for a PPOR, then change it to an IP, you can start to claim back the interest you are paying on the loan from that time on.

This is because the interest on the loan is now for an income producing purpose, and the fact that it was originally for a PPOR is irrelevant. Bank loans are not magically for a PPOR, or an Investment. The term 'Investment Loan' is merely a marketing tool to make people thing there's something special to them, other than all the features that make them attractive to an investor.

Now, I could well be wrong on this, and I'd love to hear the opinions of some of the accountants on this, but I think I'm right.

 

[The Y-man]

This is because the interest on the loan is now for an income producing purpose, and the fact that it was originally for a PPOR is irrelevant. .

Hi Tubs,

Your point is valid IF there is an exisiting loan, fully drawn, against the PPOR.

In the case of this thread, and many like it, the owners have paid off their mortgage (i.e. nothing or very little owing). They then want to refinance or remortgage when they turn it into an IP...

Cheers,

The Y-man

 

[tubs]

For sure. If the loan is fully paid, there can be no claiming the interest (unless you transfer to a trust or something similar).

And for loans that are still active, the interest being paid on that current loan is fully deductable if the property is being rented.

Its not always been clear exactly what the situation is.

 

[alexlee]

For sure. If the loan is fully paid, there can be no claiming the interest (unless you transfer to a trust or something similar).

And for loans that are still active, the interest being paid on that current loan is fully deductable if the property is being rented.

Its not always been clear exactly what the situation is.

Hope this question isn't too basic for you guys. My parents have bought a new property which will be their PPOR. They want to rent their current PPOR for couple of years until the market improves. The current PPOR is fully paid off. Can they re-mortgage it to negative gear it?

In this case, since the PPOR is fully paid off, there is no existing loan that will 'convert' to deductible when you change it to an IP, and any new borrowings will depend on the purpose to which the loan is used.
Alex