Buying partner's 50% of IP

[The Project Mgr]

Hi folks,

Our jointly owned PPOR has became an IP in April when we moved out. It is rented currently, and since we have been paying off the loan when it was a PPOR, the LVR now stands at about 46%. I would like to see if we can get a better LVR by my husband buying my share of the IP. Below is my calculations of the new loan amount after my husband buys my share. Which one is correct - blue or green?

current house value $875,000
original purchase price $565,000
current loan limit $700,000 80% LVR
current loan balance $402,000 46% LVR

Husband buys my share
amount to pay my share: $437,500 = $875K /2
EXTRA loan to pay me: $350,000 = 437.5K * 80%
total loan = $752,000 = ($402K + $350K)
LVR: 85.9%
Is the above the correct TOTAL loan amount?


OR is total loan = $551,000 = [ ($402K / 2) + $350K ]
LVR: 63.0%
OR the above the correct TOTAL loan amount?

Thanks for your help.
PM

 

[tubs]

Sorry, you've got it completely wrong. You dont have to do anything like that.

You can just refinance it to whatever LVR the banks will let you go to. Dont need to change the ownership or sell to your partner or anything like that.

I suggest you give a mortgage broker a call and they'll help you out.

 

[Qlds007]

Sorry Tubs that is NOT the case.

Just by increasing the loan on an IP does not mean the interest becomes tax deductible.

The ATO "Purpose Test" governs the interest deductibility and as TPM has stated by purchasing the interest of the other party to the property out then the loan purpose would be acceptable.

One consideration in doing this is that you may incur additional stamp duty and your partner may incur CGT on any profit.

There are a couple of things you should have done including doing a letterhead valuation to show the value now is the same as it was when you started to rent it out.

Before i crunch the numbers you need to look at your whole position rather than this property in isolation.

 

[tubs]

Actually, its the post that doesnt have enough info in it.

I never suggested it would become deductable. It wouldnt.

But the way I read it, the goal was simply to draw out more money by increasing the LVR, which can be done without changing ownership. Tax wasnt mentioned.

 

[The Project Mgr]

My apologies, I wasn't clear. Richard is right - the reason for increasing the loan amount is to increase tax deductions on the loan interest.

Richard,

Please advise what other information is needed to crunch the numbers? I can PM you.

many thanks
PM

 

[Qlds007]

PM Probably need a quick break up of your assets / liabilities and a note of your husbands income (I assume he is on the highest marginal tax rate).

Also which State or location the property is in.