Deductability after subdivision

[RumpledElf]

Did the math, realised that depending on what the housing SA guy says, we could be $10-12k PA positively geared within a year of first becoming landlords, assuming someone gives us a loan and we keep the houses rather than sell. Amazingly, this would raise our household income to *above* the median

But - current house was bought at land value and then subdivided. I know for capital gains purposes, if we ever sell it the 'base' price for capital gains is only half what we paid for it (or more specifically fractionally under half as it wasn't quite subdivided into two equal halves, but that is splitting hairs).

My question is, is the interest on that 50% of purchase price that will be attached to the subdivided part of the property (once the forms are processed) still deductable if the original property becomes an IP? Subdivided part will become our PPoR late this year. Right now we have one loan for this property but we're waiting on various forms to go through for the subdivision, I assume what will happen in the end is it will remain one loan but with the two new titles as security - it is also secured by my old house - which is a nasty mix.

I'm suspecting it is not deductable and I'm opening up a x-colled mixed use loan accounting nightmare and our current house will be way more positively geared than we think it will be.

 

[dr.jauncey]

My question is, is the interest on that 50% of purchase price that will be attached to the subdivided part of the property (once the forms are processed) still deductable if the original property becomes an IP? Subdivided part will become our PPoR late this year.

Hi, if that loan relates partly to the purchase of the property (subdivided land) which is about to become your ppor, then the interest won't be deductible for that portion. The portion relating to what is now an IP will be deductible as the purpose of that loan is to hold an income-producing asset.

Might be worth talking to your accountant about getting the portions worked out and refinanced to the correct splits to make life easier for everyone moving forward. On the other hand, it's more your accountants problem than yours. Might increase your ITR bill though.

 

[RumpledElf]

That's what I thought. If we manage to get a loan to build - this house will have 12% yield on the current mortgage so it should get us over the line - I guess that would be a good moment to refinance that land component out into the construction loan. I have a feeling the bank will be wanting to revalue the house anyway when they get their form from this big pile of subdivision paperwork.

Which means I get a PPoR with a loan pushing 95% LVR (on construction costs not completed value - just under 60% on completed val) secured by two IPs which will both yield in the 20%'s because they will both be at around 30% LVR. Which is what all the books tell you NOT to do and sounds like the reverse of what most people do. What a way to start this property investment lark ...

Just as well we're after income not tax deductions, really.