Buying costs for PPOR deductible when turned to an IP?

[Pablo]

Hi,

We are buying a new property which we are going to live in for 5 years or so and then develop. I was going to borrow the money for the buying costs and am wondering if the interest on this loan will be deductible after the property is developed and becomes an IP as it was originally used to fund the PPOR buying costs.

 

[Jonathon]

Hi Pablo

By "buying costs" I assume you mean stamp duty, legals, etc? If you do, hence you're borrowing say 105% of the house, it'll be deductible when you eventually turn the property into an IP, PROVIDED that you don't contaminate the borrowing with private use.

By that, I mean that you can't draw down any funds from the mortgage after you buy the house, unless the draw down is specifically to add value to the house, i.e. you can't drawdown $20k from your mortgage to buy a car, but you can do it do add a pool.

You absolutely must consider either an offset mortgage or an interest only mortgage, they're simply the only games in town for someone in your position.

Interest only is ok if you have an alternative place to invest any spare cash, but for most people an offset account will give you the best return on any spare cash.

(If you take out an normal repayment mortgage, then in the first 5 years you will pay down approx 11% of the loan value)

Finally, if you pay Lender's Mortgage Insurance it'll be written off for tax over 5 years, so you won't get any benefit once it becomes an IP, although if you've borrowed to pay the LMI that than borrowing is subject to the same rules as above.

I hope this helps.

Cheers
Jonathon

 

[Pablo]

Thanks Jonathon,

You answered my question perfectly.

 

[taxguy]

Buying costs such as legals and stamp duty are never deductible outright, they add to the cost base of the property and are subtracted from your eventual capital gain (if any). This applies whether it's a PPOR or an investment.

In your case, you might not even get that benefit, if you pay no capital gains on the sale of the PPOR (it can be rented out for up to 6 years and you still get the exemption, assuming you own no other PPOR in that time).

The only exception is borrowing costs, such as mortgage application fees, LMI and mortgage stamp duty, which are deductible over five years.

Still, don't contaminate the mortgage - you want to get your full interest deductions when you ultimately rent it out.

 

[TseTse]

There's something I didn't quite grasp from the above postings:

So you've got a PPOR and turned it into an IP, if the place has an LMI which is capitalised then it is tax deductible? or is it always tax deductible?

Cheers

 

[Jonathon]

The LMI is only deductible once it becomes an IP. If you pay $10k LMI, which is capitalised into the loan, then you turn it into an IP 3 years after buying it, you still have $4k of LMI to be deducted in years 4 & 5 ($2k pa).

The $6k that is 'written off' in years 1-3 isn't deductible.

The interest on the loan is fully deductible, from the moment it turns into an IP, subject to the usual laon contamination rules.

Cheers
Jonathon

 

[Joey5641]

What happens if you don't borrow money for "buying costs"?
We're in a similar situation, with only 80% of actual price mortgaged (essentially to avoid LMI)? Current loan is set up as interest only with an offset account?

 

[Jonathon]

What happens if you don't borrow money for "buying costs"?
We're in a similar situation, with only 80% of actual price mortgaged (essentially to avoid LMI)? Current loan is set up as interest only with an offset account?

No LMI paid means no deduction for LMI...or am I missing something?

 

[Joey5641]

Jonathan - sorry I didn't clarify my query properly - I was actually asking about stamp duty, legals. Can you deduct them if you convert from a PPOR to IP after 2-3 years?

 

[Jonathon]

Jonathan - sorry I didn't clarify my query properly - I was actually asking about stamp duty, legals. Can you deduct them if you convert from a PPOR to IP after 2-3 years?

Not for income tax purposes, they're capital items so only deductible for CGT, if and when you sell the house.