Converting IP to PPoR and tax implications

[Zeddy]

I have 3 properties.

IP#1: Bought $278K
Revalued and drawn to 80% of $299K for third property purchase
Original loan = $222.4K
Additional loan amount (refinanced) = $16.8K

IP#2: Bought $270K
Revalued and drawn to 80% of $292K for third property purchase
Original loan = $216K
Additional loan amount (refinanced)= $17.6K

IP#3/PPoR: Settling tomorrow for $399.2K with 80% LVR
Loan amount = $319.36K
It has an offset account I intend to drop all my salary into

In the immediate future I will be renting IP#3 out to family who live nearby and are demolishing/rebuilding their house. It will be purely for investment purposes.

When they are done, I am considering moving into IP#3 and making it my PPoR in 2013.

Question: Have I 'tainted' the purpose of the funds if I move into it as a PPoR in 2013? I currently intend to claim all three for taxation purposes as IP. What happens to my claims on interest for taxation?

ie when it becomes my PPoR, is my non-claimable loan interest applied to:
16.8+17.6+319.36=$353.76K

 

[Aaron_C]

And what was the purpose of the additional loan amounts refinanced from IP #1 and #2? Were they used for IP #3?

 

[Zeddy]

And what was the purpose of the additional loan amounts refinanced from IP #1 and #2? Were they used for IP #3?

Yes, they were used for IP3.

 

[Zeddy]

And to further complicate matters, is the following scenario correct?

In 2013:

Put out two rooms @ $135 pa = $13500 in a boarding arrangement

Compared to tax benefits of claiming interest on $353.76K
Interest = $26.532K pa (based on 7.5% interest)
Tax benefit = 30% x $26.532 = $7959.60 < $13500

Thus, for more cash-in-pocket and CGT benefits, it is best to use a boarding arrangement UNLESS I need to up my loan servicing capacity.

 

[Aaron_C]

Yes so when you move into IP#3 all the loans used for the purchase will become non-deductible debt.

As for the benefit of boarding vs renting it out (for tax), interest is not the only thing you can claim a deduction for. Don't forget additional outgoings like rates, maintenance etc that can also be claimed as a deduction. But usually cash-in-hand is best.

 

[Peter_Tersteeg]

Any loans used to purchase the property you live in cannot be claimed whilst you live in that property. As a result, some of your increases may not be tax deductable if they were used as a deposit against IP 3.

It's likely your increases are in the same loan account, which might mean you need to apportion part of the interest in those loans to deductable and non-deductable purchases. Unfortunately this can make things a little tricky and it's difficult to realistically forcast this sort of thing happening for many people. An offset account can save the day in this situation in some cases, but again that requires a fair bit of forward planning.

 

[Zeddy]

Thanks Aaron and PT Bear. I appreciate your thoughts.

I've fallen in the trap of not knowing the best finance setup when starting up. Hopefully with an offset for IP#3, it'll become easier for future purchases.

If we're talking about moving in and out of the property as an IP/PPoR, should I be having a valuation carried out at the start/end of the PPoR period for CGT computation purposes? I am looking at demolishing the house and developing it into 2 detached houses/a duplex hopefully within a 5 to 10 year timeframe.

Hope I'm not wandering too far off the original topic with all these questions!

 

[Peter_Tersteeg]

If IP 3 has increased in value since you purchased, you could always top-up this loan and use the proceeds to reduce the loans on the other properties by the amounts you used to purchase IP 3.

This would restructure the loans such that all the funds borrowed to purchase IP 3 are now secured by IP 3, thus removing the problem of how much you can and can't claim.

 

[Zeddy]

That's a thought!

However since I'm settling on it tomorrow I don't think it'll be possible just yet though.

I'll file that idea away for future reference. It's a good one.

 

[Peter_Tersteeg]

By 2013 you may have more than sufficient equity to do it. Don't stress about it today.