Confused - Upgrading to bigger house and keeping this as IP!


I just need a little advice as I am rather confused about my situation and I am finding it diffcult to find out the correct answer.

Basically we are wanting to upgrade to a bigger house and were hoping to keep this house as an IP. We owe $145,000 and this house is worth about $340,000. We have about $26,000 in redraw available as we are making double repayments at the moment.

I was under the assumption that it would be best to increase our existing loan up to about 80% and the extra funds could be used as the deposit on our next property. Then we would purchase a new property and use those funds as the deposit and then we would change the initial loan to an investment loan and make it IO and then we could negative gear the IP (current home). And then the extra funds from the rent could be used to pay down our owner occupied home. We will get about $300 rent a week.

This is what we were working off and had discussed with our MB (who doesnt speak very good english). I then approached another MB this week or advised us that we will not be able to negative gear this property as it goes off the orginal loan amount and thus it will be positive geared and maybe we should consider selling this house.

So now I am very confused. All I know is we need a bigger house and would love to have an investment property.

Am I completely on the wrong path, does anyone have any suggestions as to how we could structure things. I honestly have no idea what is the right way to go about things.

Thanks in advance
Stop making extra repayments now direct to the loan. Get yourself an offset account if available through your lender and put extra funds in there. At present the $145k should be deductable when turned into an IP. Might be worth making current loan IO also but would need to look at overall position.
If you used the $25k redraw to improve the property then this could portion could once again become "good debt".

Your accountant would be the best judge of what's claimable and of how much benefit it is to you.

Basically we are wanting to upgrade to a bigger house and were hoping to keep this house as an IP. We owe $145,000 and this house is worth about $340,000. We have about $26,000 in redraw available as we are making double repayments at the moment.

Michelle, if today you moved out of your home and turned it into an IP, then the interest on the $145K loan you still have is the only bit that is tax deductible. As already stated you need to stop paying down loan principal immediately and pay IO.

If you redraw any $'s and spend it on this house then that additional loan interest would also be tax deductible.

If you rent this property out at $300pw, then you will be paying tax on some part of that income (as the loan interest on $145K will not amount to $300pw that you are receiving in rent).

Any equity draw-downs that you make from this property for private expenses (such as buying your next home to live in) will not be tax deductible. So from a tax perspective you do have the situation the wrong way around. Small tax ded. debt on IP & large non tax ded. debt on PPOR.

HOWEVER, do not despair.
1. Eventually (say in 10 years time) this will be the same situation with an IP purchased now with 100% debt. i.e. $300K IP with a loan of $300K earning $300pw now will turn into a $600K IP with a loan of $300K earning $600pw in rent and you will be paying tax on some of that rental income. So in some respects you have simply travelled forwards in time by 10 years in respect to income & tax to get to a similar situation
2. If you are going to be in PI for any length of time you'll need an MB you can understand & who can understand you. This stuff is pretty simple. It can get more complex later the more IPs & entity structures you have
3. If your current PPOR is in joint names (as it is with most husband-wife) then there are strategies to 'sell' your half share to the the other half owner etc. but these strategies are best discussed with a knowledgeable MB & property savvy Accountant where all your financial details are known
4. Also beware of doing things now purely for tax benefits such as neg gearing. Investments should never be entered into on the basis of tax benefits alone. These things can be (and have been) withdrawn & changed by the stroke of a government minister's pen

The other option is to sell the current home, and buy new home and a new IP.

This lets you:

1. take tax free profit on the CG

2. buy an IP that *may* be more suited to renting out - eg location, facilties, etc (a lot of people have an emotional attachment to their previous home - so they can be really hit hard when a tenant trashes it).

3. make agents happy by generating lots of revenue from you.... urr... hang on, maybe this one's not a benefit for you..... :eek:


The Y-man