Change of use (PPOR - IP) & tax deductibility of loan interest

[Donna L]

Change of use

Just to clarify. In API recently, Dale replied to a question that if your PPOR becomes an investment property you can now claim mortgage interest on the original loan.

I.e if you bought the home as PPOR and took out mortgage when you leave and the tenants move the interest on the rest of that mortgage is tax deductible???

If you have paid out your PPOR, however, and borrow against that house to buy new home you cannot claim any interest i.e. it cannot be seen as a form of "refinancing".

What happens if you have convernted previous LOCs for personal expenditure and incorporated them into the home loan subsequently and then decide to move on. Is it only the very original home loan that can be counted or the new home loan incorporating the additional expenditure that is tax deductible? I always thought it was the purpose for the loan that determined its tax deductbility hence the original home loan on your former PPOR would not be tax deductible even when it became an investment property.

Question 2.
Someone suggested selling PPOR to Family Trust to obtain tax deductibility of loan but would any tax savings here be wiped out by Stamp Duty and accountancy costs on the transfer or is this still better than selling the house, paying the agent's commission, buying your new home and then drawing against the equity to buy investment property. Or alternatively do you use the rent on the old PPOR to pay the mortgage on the new PPOR

Sorry this is rambling but I hope you get the drift??

Donna L

 

[Sim]

Re: Change of use

Originally posted by Donna L
I always thought it was the purpose for the loan that determined its tax deductbility hence the original home loan on your former PPOR would not be tax deductible even when it became an investment property.

This is a common misconception, and one sadly propogated by some misguided accountants too !

The key is not to confuse the "purpose" being to buy a "PPOR" as opposed to a "house". The loan is to buy an asset. This asset is a house. While you live in the house as your PPOR, the interest on the loan is not tax deductible, but it is still a house. If you move out of the house and rent it out, the interest on the loan used to buy the house becomes tax deductible, but it is still a house.

Can you see that the "purpose" has not changed ? It's the house you are buying, NOT a "PPOR" !!!

Now, the other thing to remember is that you only ever get to use funds once for a single purpose (in general). So if you pay off some of your loan, then redraw the money back again (for whatever use), you can NOT associate that redrawn money to the property - you've already paid it off once, you don't get to do so again.

This kind of thing with LOCs begins to get very tricky. You really need to think ahead with LOCs and refinancing. Get a good independent mortgage broker who understands the ramifications of setting things up a certain way. They may not be able to "advise" you on the tax side of things - but their experience should be able to "guide" you to set things up in the most flexible way so that your accountant will have few problems sorting it all out at tax time.

Never ever ever let a person at the bank choose your loan structure - they will always do what is best for them, which is rarely what is best for you. Always get advice - preferably from both an accountant who understands property and from a broker who understands tax.

Originally posted by Donna L
Question 2.
Someone suggested selling PPOR to Family Trust to obtain tax deductibility of loan but would any tax savings here be wiped out by Stamp Duty and accountancy costs on the transfer or is this still better than selling the house, paying the agent's commission, buying your new home and then drawing against the equity to buy investment property.

You really need an accountant to do a cost/benefit analysis with you. They will help you work out exactly what it will cost you to make such a move and work out how much they think you should save by doing so. This is not the kind of thing that is easily decided - as your own personal circumstances (tax bracket, other assets etc etc) will have a strong bearing on the outcome.

You wouldn't need to use an agent to "sell" a property to a trust or anything - so don't count things like an agent's commission. There will be legal costs though.

 

[DaleGG]

Re: Change of use

Hi Donna!

>Just to clarify. In API recently, Dale replied to a question that if >your PPOR becomes an investment property you can now claim >mortgage interest on the original loan.

>I.e if you bought the home as PPOR and took out mortgage >when you leave and the tenants move the interest on the rest >of that mortgage is tax deductible???

>If you have paid out your PPOR, however, and borrow against >that house to buy new home you cannot claim any interest i.e. it >cannot be seen as a form of "refinancing".


I am sorry that I was not specific enough, or clear enough and thus caused some confusion. . . I'll try to do better here.

The interest on what is left of the initial debt to buy the house is allowed as a tax deduction as the loan was origibally taken out to buy a property (as Sim stated) and not a PPOR.


>What happens if you have convernted previous LOCs for >personal expenditure and incorporated them into the home loan >subsequently and then decide to move on. Is it only the very >original home loan that can be counted or the new home loan >incorporating the additional expenditure that is tax deductible?


Yes, you are right. It is only what is left of the original loan that can be claimed.


>I always thought it was the purpose for the loan that >determined its tax deductbility hence the original home loan on >your former PPOR would not be tax deductible even when it >became an investment property.


I think that Sim answered this brilliantly when he said that the loan was to buy the house and the fact that it was used a PPOR becomes irrelevant.


>Question 2.
>Someone suggested selling PPOR to Family Trust to obtain tax >deductibility of loan but would any tax savings here be wiped >out by Stamp Duty and accountancy costs on the transfer or is >this still better than selling the house, paying the agent's >commission, buying your new home and then drawing against >the equity to buy investment property. Or alternatively do you >use the rent on the old PPOR to pay the mortgage on the new >PPOR


There should be very little in accounting costs involved and as Sim suggested, it is best to look at a number of issues such as the initial costs like the establishment fees (say $2,000); the stamp duty on the transfer and the loan application fees.

Then, we would compare these costs to both the long term benefits, and, asset protection issues. At the end of the day, it will be your choice based on your facts, circumstances and issues. The strategy suggested does work for some, but, not for others.


Have fun

Dale