Converting non-tax deductible to tax deductible?

[s050399b]

For example:

PPOR Loan Limit = $200k
PPOR Loan Account current Balance = $200k (debit)


1) put $100k cash into PPOR Loan
2) take out $50k for settlement of a property
3) put $100k cash into PPOR Loan
==> is the PPOR loan 100% converted to tax deductible? provided that future redraws are for investment purposes

 

[s050399b]

I know if I were to put it $200k cash in it all at once, it would be 100% tax deductible in the future if I were redraw it for investment purposes;

but not sure if I were to put it in in 2 lots,

 

[The Y-man]

I know if I were to put it $200k cash in it all at once, it would be 100% tax deductible in the future if I were redraw it for investment purposes;

but not sure if I were to put it in in 2 lots,

Gets very messy from what I understand.

Basically interest on the $50k you draw down is deductible. This is 25% of your total loan value. So 25% of your interest cost is deductible.

HOWEVER when you put $100k BACK in, it is apportioned back to the investment and "own use" proportions. In a simplistic way, $75k of the $100k paid back is applied to the non-deductible loan, and $25k is applied to the deductible.

SO now you can only claim interest on $25k as a deduction.

Now if you draw down again... you need to reapportion etc etc

See how your accountants bill goes up?

<......deleted section re offsets.....>

The Y-man

 

[s050399b]

100% offset does not make PPOR Loan tax deductible?



I think I probably will do this
PPOR Loan Limit = $200k
PPOR Loan Account current Balance = $200k (debit)


1) put $199.99k cash into PPOR Loan (I think if pay full, it will close your loan account?)
2) take out $50k for settlement of a property
3) in the future, only redraw this "PPOR Loan" for investment purposes






PPOR Loan with offset => outstanding loan is not tax dedutible?

[ Step 1 ]
PPOR Loan Limit = $200k
PPOR Loan Account current Balance = $200k (debit)
PPOR Loan Offset = $200k
Net = $0


[ Step 2 - taking $50k for investment ]
PPOR Loan Limit = $200k
PPOR Loan Account current Balance = $200k (debit)
PPOR Loan Offset = $150k ($50k taken out)
Net = $50k debit (this $50k is not tax deductible)

 

[Simon]

Will this be your PPOR forever?

Often a first home becomes an IP after you need to upsize. Having all your equity in it then might be a bigger problem.

That's where an offset is valuable.

 

[s050399b]

PPOR Loan Limit = $200k
PPOR Loan Account current Balance = $200k (debit)



[ Step 1 ]
put $199.99k cash into PPOR Loan

[ Step 2 ]
take out $50k for settlement of a investment property

[ Step 3 ]
take out $50k for settlement of a investment property

[ Step 4 ]
take out $50k for settlement of a investment property


[ Status Check ]
PPOR Loan Limit = $200k
PPOR Loan Account current Balance = $150k (tax-deductible debit)


...5 years later...


[ Step 5 ]
property value has rise
apply for a higher limit ($400k)



[ Status Check ]
PPOR Loan Limit = $400k
PPOR Loan Account current Balance = $150k (tax-deductible debit)




[ Step 6 ]
found a better home; this "PPOR" becomes IP

Con: unable to use equity from "ex-PPOR" home to pay for settlement of a new PPOR home (accounting nightmare)





vs




PPOR Loan Limit = $200k
PPOR Loan Account current Balance = $200k (debit)
Offset = $200k
Net = $0 interest


[ Step 1 ]
take out $50k from offset for settlement of a investment property

[ Step 2 ]
take out $50k from offset for settlement of a investment property

[ Step 3 ]
take out $50k from offset for settlement of a investment property



[ Status Check ]
PPOR Loan Limit = $200k
Offset = $50k
Net = $150k (non tax-deductible debit)

...5 years later...


[ Step 5 ]
property value has rise
apply for a higher limit ($400k)



[ Status Check ]
PPOR Loan Limit = $400k
PPOR Loan Account current Balance = $150k (non tax-deductible debit)




[ Step 6 ]
found a better home; this "PPOR" becomes IP

Pro: use equity in ex-PPOR to settle new PPOR, and rent out ex-PPOR; is the whole loan in ex-ppor is tax-deductible?

 

[s050399b]

Will this be your PPOR forever?

Often a first home becomes an IP after you need to upsize. Having all your equity in it then might be a bigger problem.

That's where an offset is valuable.

then I have to use the equity in the ex-ppor to buy investment properties, and use after-tax money to use as a settlement for new PPOR?

 

[The Y-man]

PPOR Loan with offset => outstanding loan is not tax dedutible?

Yeah, actually, now that I've thought about it, the offset won't help you....

The Y-man

 

[PeterC]

i dont think this will work (if i've understood correctly). since a re-draw is considered an extension of the loan above the original amount? this is why people with PPOR that pay off/redraw continually (using it as a psuedo offset) get in big trouble when they think their remaining $300k loan turns deductible when they change it to IP, only to find theyve sent $400k back and forth over 400 x $1k pay-off/redraws over the years.

i.e.:

[ Step 1 ] put $199.99k cash into PPOR Loan
Loan total value for tax purposes still $200k, 0% deductible so far

[ Step 2 ] take out $50k for settlement of a investment property
Loan value for tax purposes $250k, $50k of which is deductible = 20%

[ Step 3 ] take out $50k for settlement of a investment property
Loan value $300k, $100k deductible = 25%

[ Step 4 ] take out $50k for settlement of a investment property
Loan value $350k, $150k deductible = 43%

[ Status Check ]
PPOR Loan Limit = $200k
Offset = $50k
Net = $150k (non tax-deductible debit)
% of interest deductible = $150k/$350k = 43%. not 75%