Interest deductable on equity drawn?

[sebsez]

Hi All,

Scenario
Have an existing PPOR with substantial equity. Would like to draw upon the equity by refinancing the PPOR loan to fund the deposit for a new PPOR and the existing PPOR will become an IP. Now even though the refinancing of the existing PPOR loan will increase the total existing PPOR loan size and hence increase repayments on the loan, as I understand it, because the drawn funds are for a new PPOR and not an IP then the interest on those drawn funds is not tax deductable... Is that correct?

Secondly, once the existing PPOR becomes an IP then CGT will be calculated on any capital gain in the property from that point onwards, is that right? So if the property was purchased for $150K and now is worth $420K, at which point it becomes an IP, then CGT will only be calculated on any increase on $420K? I also remember reading about a 7 year rule, where you can live away from your PPOR for up to 7 years before CGT comes into effect, does anyone know anything more about this?

Cheers

Seb

 

[alexlee]

Have an existing PPOR with substantial equity. Would like to draw upon the equity by refinancing the PPOR loan to fund the deposit for a new PPOR and the existing PPOR will become an IP. Now even though the refinancing of the existing PPOR loan will increase the total existing PPOR loan size and hence increase repayments on the loan, as I understand it, because the drawn funds are for a new PPOR and not an IP then the interest on those drawn funds is not tax deductable... Is that correct?

Not deductible, because the refinanced amount is used for a new PPOR and not for income producing purposes. It's purpose to which the funds are put to, not what property it's secured against.

I also remember reading about a 7 year rule, where you can live away from your PPOR for up to 7 years before CGT comes into effect, does anyone know anything more about this?

I'm assuming you're talking about the 6 year rule, which states that you can move out of your PPOR, rent somewhere and maintain the CGT free status fo your PPOR for 6 years. HOWEVER, you can only use this IF you do NOT claim another PPOR during those 6 years. So if you buy another PPOR then this rule doesn't apply.
Alex

 

[Milkieboy]

Hi Sebsez,

You might want to esnure that you have you PPOR properly valued before it becomes an IP. My wifes PPOR became an IP before we got married (moved in together in my PPOR). We never had it valued before she moved out and we rented it out for about 3 years. When we went to sell it we needed to work out the CGT, but didnt know the value of the property 3 years ago. We had to get it valued by someone from photos and an inspection to work out what it was worth 3 years ago so we could then work out CGT. While it wasnt much of a hassle, next time I would get valued before making into an IP.

Ian