from PPR to IP - loan interest deductions

[BobG]

Hi fellow forum people – you’ve helped me in amazing ways before and I have a new question :

In 2011 I moved into an IP house and so it is currently my PPR. The balance of the LOC loan when I moved in was 100K.

Soon I am moving out of the PPR house and want to turn it back to a IP. The balance of the loan is currently 70K.

Question 1 : Can I increase the LOC loan amount back up to 100K and set up an OFFSET account for 30K, then move out of the house (thus changing it from a PPR to an IP), spend the 30k on non tax deductable / non investment items, and then claim interest as a tax deduction on the 100K IP loan ?

Question 2 : Can I increase the LOC loan amount up to say 200K and set up an OFFSET account for 130K, then move out of the house (thus changing it from a PPR to an IP), spend the 130k on non tax deductable / non investment items, and then claim interest as a tax deduction on the 200K IP loan ?

Other info : I’m a PAYG salary man, the house in question cost 160K in 2000.

hope someone can help

many thanks

 

[Peter_Tersteeg]

Firstly, you can't have a LOC with an offset account. They don't come that way. You can have an interest only loan with an offset account and this can work just as effectively as a LOC to access your equity.

Question 1 : Can I increase the LOC loan amount back up to 100K and set up an OFFSET account for 30K, then move out of the house (thus changing it from a PPR to an IP), spend the 30k on non tax deductable / non investment items, and then claim interest as a tax deduction on the 100K IP loan ?

If you do this, then $70k of the loan will be tax deductible and $30k will be non-deductible. You can only claim the interest on the $70k.

Question 2 : Can I increase the LOC loan amount up to say 200K and set up an OFFSET account for 130K, then move out of the house (thus changing it from a PPR to an IP), spend the 130k on non tax deductable / non investment items, and then claim interest as a tax deduction on the 200K IP loan ?

You're going from bad to worse.

Moving money into an offset account doesn't make the loan tax deductible. You've borrowed money (regardless of where you've moved it to) for non-deductible purposes, so you don't get to claim the interest. The best case you'll get in any scenario is to claim interest on the original loan, which is $70k.

It potentially gets even worse. By mixing the two together in a single account, you're mixing the purpose of the loan. If you make a payment on the loan, are you paying off the tax deductible or the non-deductible portion? If you move money in and out of the loan a few time, you may find that ATO decides that none of the interest is tax deductible. If you do want to access your equity in this fashion, set up a second loan (instead of increasing the existing one) so you've got a clear separation of what's deductible and what's not.

 

[Terry_w]

Hi fellow forum people – you’ve helped me in amazing ways before and I have a new question :

In 2011 I moved into an IP house and so it is currently my PPR. The balance of the LOC loan when I moved in was 100K.

Soon I am moving out of the PPR house and want to turn it back to a IP. The balance of the loan is currently 70K.

Question 1 : Can I increase the LOC loan amount back up to 100K and set up an OFFSET account for 30K, then move out of the house (thus changing it from a PPR to an IP), spend the 30k on non tax deductable / non investment items, and then claim interest as a tax deduction on the 100K IP loan ?

Question 2 : Can I increase the LOC loan amount up to say 200K and set up an OFFSET account for 130K, then move out of the house (thus changing it from a PPR to an IP), spend the 130k on non tax deductable / non investment items, and then claim interest as a tax deduction on the 200K IP loan ?

Other info : I’m a PAYG salary man, the house in question cost 160K in 2000.

hope someone can help

many thanks

LOCs scare me. Did you ever make any deposits in the LOC other than paying interest - eg. salary credit?

I would suggest you don't borrow money and park it in an offset account or you risk losing deductibility.

 

[BobG]

Thanks Peter - are you saying that I can only claim interst on the actual loan amount at the time I leave the property and turn it back into an IP ? Last month the loan balance was 65K but ive since spent 5k on a bike. Now the balance is 70k. What if i spend another 10K before i move out and the loan balalnce increases to 80k ? (which is still a smaller loan than when i moved into the property)
thanks again

 

[Terry_w]

Thanks Peter - are you saying that I can only claim interst on the actual loan amount at the time I leave the property and turn it back into an IP ? Last month the loan balance was 65K but ive since spent 5k on a bike. Now the balance is 70k. What if i spend another 10K before i move out and the loan balalnce increases to 80k ? (which is still a smaller loan than when i moved into the property)
thanks again

If you have ever withdrawn from the loan then the amount you can claim interest on could be much smaller than the actual balance at the time you move out of the property.