Changing from a PPOR to IP

[pennyk]

Hi,
My work colleague is planning to move out of her PPOR and make it an IP, and buy a new PPOR. She has a mortgage currently on the PPOR. She has spoken to an accountant who have told her she is not able to legally refinance the PPOR to its current value and negatively gear it as an IP. They have said that she would have to keep the mortgage as it is and have it as a positively geared IP. Someone else she knows has also been given the same advice from a different accountant.
I thought this was the backbone of many people's investment strategies! So, I think the accountants advice must be incorrect. Can anyone shed any light on this for us!?
Thanks,
Pen

 

[The Y-man]

You got part of the story

You can refinance, HOWEVER, the portion of interest on the money you get ABOVE the current mortgage will NOT be tax deductable.

The only way you can make it tax deductible will be to use that extra money for income producing purposes (eg another IP or managed funds).

That money can not be be used for "personal purposes" - eg next ppor.

Hope this makes sense.

Cheers,

The Y-man

 

[The Y-man]

.
I thought this was the backbone of many people's investment strategies!

I believe the backbone of many people's strategies would be to stay in the ppor, and buy IP's (using equity from their ppor as deposit).

Where they want to move ppor, they seem to either
1. sell it and take advantage of the extremely generous CGT discount (100%)

or

2. never pay off the mortgage on the ppor in the first place (eg maintain an offest account, or refinance and invest in income producing vehicels).


Cheers,

The Y-man

 

[speedbump]

PPOR to Ip

I have a similar question in relation to TAX deductibility.
Situation.
Cross coll loans - 2 properties.

Total loans $740000 (80%) LVR

2 properties - 1 x PPOR, 1 x inv prop + LOC (deposit for new PPOR)

Scenario- Sell PPOR - $650000

Owe app $100000 on investment prop- (valued at $350000)

Refinance up to 80% of investment prop (extra $180000)

Pay down new PPOR.

What is Tax deductibility of ($180000)

I have been told by someone who should know that the $180000 is still tax deductible.

I don't agree.

Any comments

Speedbump

 

[wish-ga]

For tax deduction reasons this is not the most ideal situation

But one may retain the property for other reasons also. If it was purchased with a view to renting it out at some stage because it is in an area that is sought after for rentals, has increasing land values, good infrastructure/transport then this is a reason for keeping it.

Can someone explaing to me simply the sense in selling ppor only to buy one two blocks away and you still go and look for a ppor? Wouldn't the costs involved in buying another rental property be as much as any of the tax deductions?

I know turning a ppor into an ip is a big no-no but because I haven't lived it the reasons are academic and I haven't got a grip on it......

Can someone explain?

 

[Mr. Fabulous]

I know turning a ppor into an ip is a big no-no but because I haven't lived it the reasons are academic and I haven't got a grip on it......

Can someone explain?

Hi wish-ga,

It's not a big no-no, depending on whom you talk to. Some people prefer to sell the existing PPOR, use the equity to pay down some of the non-deductible debt on the new PPOR then access the equity to buy another property.

Personaly, I think this strategy is akin to shooting yourself in the foot if you can afford to hold the original PPOR. Note that the interest on the loan becomes tax deductible once it becomes an I.P.

Other people would keep the original PPOR, be happy to pay a bit of extra (albeit non-deductible) interest on the new PPOR, based on the realisation that they are holding onto an appreciating asset and can use the equity in said to purchase another I.P.

So it's a bit of a trade off, really. In the first example, you reduce your non-deductible debt, but have only two appreciating assets (one PPOR + one I.P.). In the second example, you have a higher non-deductible debt but three appreciating assets (one PPOR + two I.P.s).

In a recent thread, I threw up some quick numbers showing the difference after twenty years of choosing to sell the original PPOR or choosing to hold the original PPOR as an I.P. You'll need to look for it as I don't have a link to it.

Mark

 

[Ozsunrise]

The thread is: http://www.somersoft.com/forums/showthread.php?t=31060
where there is quite a bit of great discussion on this very topic, thanks guys!
Susan

 

[geoffw]

My work colleague is planning to move out of her PPOR and make it an IP, and buy a new PPOR. She has a mortgage currently on the PPOR. She has spoken to an accountant who have told her she is not able to legally refinance the PPOR to its current value and negatively gear it as an IP. They have said that she would have to keep the mortgage as it is and have it as a positively geared IP. Someone else she knows has also been given the same advice from a different accountant.

I thought this was the backbone of many people's investment strategies! So, I think the accountants advice must be incorrect. Can anyone shed any light on this for us!?

My understanding is that the advice is correct, as it stands.

If the PPOR is paid off, your friend would then have to borrow against the IP (which was the PPOR) to pay for a new PPOR. Therefore the interest in not deductible.

I don't know if it's possible for your friend to rent a PPOR, and to buy a second IP using the equity from the old PPOR.

The other possibility (I think) is to effectively sell the old PPOR to a trust. You would have to pay stamp duty on the transfer; if it had not been a PPOR you would have also been liable for Capital Gains Tax.

So there would be a big hit up front, but it could potentailly save a lot later on.

Seek professional advice- from somebody who knows property, and especially someone who knows trusts (or even somebody you know who you trust )