Can I still claim tax on the redraw from IP?

[emily]

Hi Everyone, I have been reading this forum for a while and it is my first time posting a question and hopefully you can advise me.

we have a PPOR (1 bedder) and 1 IP. We are thinking of upgrading the current PPOR to something bigger and convert the current PPOR to IP. The deposit money for the new PPOR (say 60K) will need be redrawing from the existing IP. I understand that in this case we can no longer claim tax for the 60k redrawn amount.

I'm thinking what happens if we treat the new PPOR as IP first, i.e rent it out for 12 months after purchase then we move in later. Can we then claim tax on the 60k deposit money under the existing IP since the amount was for investment? Is it worthwhile to do this way?

Any advise is welcome. Thanks

 

[danwatto]

I'm no expert but I think all that the ATO cares about is the PURPOSE of the funds, not the source.

I wouldn't consider it "under the existing IP", the loan is used to upgrade another IP so that's what would be looked at if the ATO did an audit.

The security for the loan shouldn't really matter for tax purposes.

I think it's good to convert it to an IP first, ask your accountant to ensure you can claim the full amount of interest in the tax year.

Also get a depreciation schedule after you do the extension so that you can depreciate the lot onto your tax return.

Can any accountants correct me if I'm wrong?

 

[danwatto]

Also, I wouldn't use redraw... best to keep the loans seperate.

Ask the bank for a line of credit or a seperate loan advance to pay for the extension. Because two different properties is two different purposes for accounting. One day one might become a PPOR again and you need to be able to justify the source of the debt you are claiming.

Redraw is only good for spending money on property improvements to the same property in my opinion...

 

[marg4000]

Emily, if I have this right you intend to:

Draw from property A to finance property C (IP to become PPOR).

While property C is an IP the interest will become tax deductible. Once you move in it will no longer be tax deductible as the property is now owner-occupied.

The fact that the redraw was to purchase an investment property will only apply while the property is an IP. The purpose of the loan is to purchase property C and it is the use to which property C is put that determines the deductibility or otherwise.

Otherwise we would all borrow money and put it in a term deposit (investment). Six months later we cash in the deposit and buy a PPOR. Then we would all live in a PPOR with the whole debt tax deductible.
Marg

 

[manny]

That is why it is worth planning ahead & utilise an offset account just in case things do change, you have that flexibility... I swear by my offset account, has come in handy MANY times...

Cheers,

Manny.

 

[emily]

yeah, this make sense. Thanks a lot for your reply, danwatto, Marg and Manny