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From: Mike .


Converting current home into an IP?
From: Richard
Date: 6/27/00
Time: 12:16:19 AM

As a newcomer to this forum I have to say that it has proven to be a valuable source of answers to many of my questions. Well done to the regular contributors!!

My wife and I purchased a new townhouse two years ago as our first home that has proven to be a great buy. So good in fact that it would make an ideal IP as rents are also very good in the area to go with the strong cap growth in the area.

Whilst wanting to start acquiring real IP's now our need for a bigger family home will be great in a year or two so I am thinking ahead for opportunities in this area also as otherwise moving will become a big problem later if I gear up with IP's now.

In the meantime I could continue on reducing the mortgage to increase equity levels.

Does anyone have any solid advice on the logistics of converting our current home into an IP at the time of buying a new property? This would seem to be the ideal outcome.

Jan touches on this subject in her book but I just wonder how difficult, or costly it might be in real life. Maybe it is not the best solution in any case? What are the key determining factors?

Thanks Richard
 
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Max

Reply: 1
From: Mike .


Re: Converting current home into an IP?
From: Max
Date: 7/4/00
Time: 10:00:26 AM

Don't retire your home loan. Accumulate equity in an offset account and then use this as a deposit on your new home. It is essential that the loan on your existing home remains as high as possible as you can then claim the interest as a deduction when you convert this property into an investment property. Go to the ATO web site and look at Tax Ruling TR 2000/2. Goodluck
 
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Richard

Reply: 1.1
From: Mike .


Re: Converting current home into an IP?
From: Richard
Date: 7/4/00
Time: 7:49:11 PM

Thanks, Max! - I was wondering for a moment if this question was ever going to get a response. It sounds like you know a bit about this as there is obviously a fair bit of juggling to get the titles right, accountants, lawyers & extra stamp duty associated with getting the first property set up right in one name.

I have downloaded TR 2000/2 which is a fair bit of reading. I'm not quite sure I understand your angle as I thought the trick was in structuring the titles not the financing.

The new home will be the non taxable principle place of residence while I want our current property to be the IP.

I would like to know more as the answer to this will decide my IP strategy for the coming years. Have you done this yourself? Are you presuming that the first home is completely or partially paid out?

Thanks RICHARD
 
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Bob

Reply: 1.1.1
From: Mike .


Re: Converting current home into an IP?
From: Bob
Date: 7/6/00
Time: 8:46:19 PM

Let me try to explain. You want to pay off your principal residence, not your IP since the loan interest on the IP is tax deductible.

Now your present residence is going to be the IP, right? So instead of paying off the loan, you put all your cash into an 100% offset account against that loan (reducing the interest you pay while you live there but not actually reducing the loan amount). Then, when you buy your new home, you pull all the cash out of the offset account and use it in buying your new home.

This loan on the new home you pay off as quickly as possible. If you can, you renegotiate the old loan into interest only so the entire payment is deductible.

I hope that makes it clearer - I certainly hadn't thought of this strategy, but a little reading here and there and you'll pick things up really quickly.
 
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Les

Reply: 1.1.1.1
From: Mike .


Re: Converting current home into an IP?
From: Les
Date: 7/6/00
Time: 9:43:52 PM

G'day Richard,

Bob said it good - but in case you still want more, read on. I had heard "Never rent your old home - sell it, and buy another as an IP" - and had heard it from BIG names as well as the hoi polloi.

In case you haven't already, do check out the "Blinding Flash of the Obvious" replies to an entry dated 5 Jun (6/5/00) titled "Time to Move").


The major point in "BFO" being that many advisers tell you to "Sell your old home - don't rent it out". In "BFO" we dig deeper into WHY they say this, and identify that in some cases, the advice is DEAD WRONG!!!

Sue1 has done what you are considering and can probably tell you far more than I can (I HAVEN'T done this one yet!!). It was Sue1 that pulled me up over this oft-quoted remark - and the result was a "Blinding Flash of the Obvious" (or not so obvious in my case :^(

Hope it helps, Les
 
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Sue1

Reply: 1.1.1.1.1
From: Mike .


Re: Converting current home into an IP?
From: Sue1
Date: 7/7/00
Time: 8:28:18 AM

Hi Guys

Check out my previous posts: "Using Equity" 1/15/00 and "Claim previous house interest" 12/11/99 where I (attempt to) explain how we are dealing with the same situation.

I think the offset account is an excellent idea.

Cheers Sue1
 
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Richard

Reply: 1.1.1.1.1.1
From: Mike .


Re: Converting current home into an IP?
From: Richard
Date: 7/7/00
Time: 3:06:31 PM

Thanks everyone! I checked out the earlier posts and they are a big help.

I agree how something so simple can be made out to be so bad with a little bit of confusion and misinformation thrown in. This 'cordial' approach certainly beats a huge rearrangement of titles, stamp duty etc.

As they say - you can't go broke making a profit - even if there is a bit of tax to pay.

Cheers Richard
 
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