Funding an IP and a house rebuild

[Enfield]

Hi everyone. I'm new.

I was hoping to get some advice about purchasing/funding an IP and rebuilding a house I already own.

The house

I bought this 6 years ago for 750K. It was rented for 4 years, then I moved into it. Probably a bit messy tax-wise I guess, but it made sense at the time. I'm looking to knockdown and rebuild in order for it to become my main residence. Probably cost around 500K.

I owe nothing on the house, but the loan still exists and I can redraw $160K.


The IP

I'm looking to buy an IP for around 400-450K. Apart from the investment, it would also be handy to have a place to live while the house is being rebuilt.

I could buy this with other funds and the redraw (from the house) in order to buy a preferred property quickly. I was thinking of then refinancing, if that makes sense to put the loan on to the IP.

Financing

I guess I'm asking for ideas on how best to fund/structure the purchase of the IP and then move onto funding a construction loan for the house within a period of a year. And if there is a way to do it that makes it tax effective.

And then move onto the next IP.

Thanks for any advice.

 

[Qlds007]

Yes bit messy as you say but nothing which can't be overcome.

Probably a matter of working backwards.

If you are thinking of buying an IP for circa $450K you would look to secure 80% on the property itself so will need a loan against your land of 20% + acqusition costs.

Set this up and have the funds paid back into the loan itself without closing the loan.

You would then look to fund the construction loan as a sub loan against the vacant land.

Keep them separate so interest deductibility is easier to account for.

Couple of lenders will allow you to attach an offset account to a construction loan so you could look at this and have the equity loan and standalone IP loan as a base rate facility.

Probably a matter of re-working the numbers to give yourself flexibility going forward.

 

[Aaron_C]

This sounds pretty straight forward just write your plan down and then work out what order you want to do it in so you don't mess up tax deductions etc.

 

[Shahin_Afarin]

Loan 1: $500k secured against PPOR (loan purpose is construction and not tax deductible)

Loan 2: $110k secured against PPOR (funds used for IP purchase and will become tax deductible once turned into an investment)

Loan 3: $360k secured against IP (funds used for IP purchase and will become tax deductible once turned into an investment).

Re Loan 1 it seems that you have decent equity so you can either do the cashout via construction or via a pure cashout to give you more flexibility on the construction instead of progress payments.

Re Loan 3: Make sure its interest only with a linked offset and do not pay the principle down since you are converting it to an IP later.

 

[wylie]

If the poster has owned an IP for which he paid $750K six years ago, moved into it four years ago, knocks it down, rebuilds and let's say builds something that sells in two years' time for $1.2M, how on earth does the ATO work out how much capital gains tax is involved?

I realise if the house is not knocked down, it would be simply a case of four years IP, four years PPOR, therefore 50% of the gain is taxable. (Would that be reduced due to holding longer than one year?)

Where I get confused is when a house is knocked down or an owner does major expensive renovations and improves the sale value in a short space of time, way more increase in value than would happen without the renovation/rebuild.

I looked at this a while ago, thought about moving into an IP we had bought for $150K - value at the time this was considered was $500K. We thought we could do major renovation, spend say $200K and the house might have been worth $800K. If we sold at that point we would pay capital gains tax on top of having paid for the big renovation that created the higher sale price.

Wouldn't the big thing in this situation be to hold it long after the renovation is done, or you are just paying for the big renovation or rebuild and paying tax on the gain you've created with your own money, rather than paying tax on the gain that "time" has produced.

I get very confused with this scenario.

 

[Terry_w]

Complex and tricky. Get some proper tax advice.

 

[S.T]

Yeh very confusing, would having a back dated valuation done on the property when you moved into it help with future GCT for when it was a rental property?

 

[Enfield]

Thanks. If I have read the above correctly, I should look at getting a loan against the IP up to 80% and then fund the remainder separately (by a loan against the house, or I could fund this from other funds). And then get another loan (or sub loan) for the construction.

I wasn't quite clear about why it is preferable on why it would be better to use the borrowings from the house to fund part of it. Or would I be doing that anyway if I used the redraw facility from the existing loan?

Sorry if this seems pretty basic for most of you. I also need advice on appropriate structures and tax treatment, but it seems too complex to ask here!