Interest tax deductibility - IP and PPOR situation

[Scaramanga]

Hi
I have two investment properties worth about $1.5m, ungeared. The bank is willing to advance me $1m against them. I am currrently renting.
I would like to do the following:
- buy a PPOR (for say $1m): I can do this with the bank advance
- sell one of the IPs (for say $500k) and buy a new IP (for say $500k)

It seems to me that the order in which I do things affects tax deductibility of interest?

Eg, if (step 1) I draw $1m to buy the PPOR, the interest will not be tax deductible. If I then sell an IP and buy a new IP with the proceeds (step 2), then no tax deductibility here either?

However, if I sell an IP (for $500k), deposit the cash, but borrow $500k to buy another IP, that will create tax deductible interest (step 1)? Then, I can borrow the other $500k + use the $500k on deposit to buy the PPOR (step 2). This transaction ordering seems more tax effective.

Am I on point here, or am I missing something? Is there some way to borrow to buy the PPOR first, then sell/buy the IPs, but still get deductibility on the interest?

Any thoughts appreciated.

Cheers,
Scaramanga

 

[Bigtone]

Hi
I have two investment properties worth about $1.5m, ungeared. The bank is willing to advance me $1m against them. I am currrently renting.
I would like to do the following:
- buy a PPOR (for say $1m): I can do this with the bank advance
- sell one of the IPs (for say $500k) and buy a new IP (for say $500k)

It seems to me that the order in which I do things affects tax deductibility of interest?

Eg, if (step 1) I draw $1m to buy the PPOR, the interest will not be tax deductible. If I then sell an IP and buy a new IP with the proceeds (step 2), then no tax deductibility here either?

However, if I sell an IP (for $500k), deposit the cash, but borrow $500k to buy another IP, that will create tax deductible interest (step 1)? Then, I can borrow the other $500k + use the $500k on deposit to buy the PPOR (step 2). This transaction ordering seems more tax effective.

Am I on point here, or am I missing something? Is there some way to borrow to buy the PPOR first, then sell/buy the IPs, but still get deductibility on the interest?

Any thoughts appreciated.

Cheers,
Scaramanga

i would split the loan on the PPOR in two so when you sell IP you pay down one of the splits to zero, that reduces the PPOR debt to $500k, then you redraw the money from the split that was paid down to zero and to buy new ip and as now used for investment purposes it becomes tax deductible, must keep loans completely seperate

 

[Rolf Latham]

and the remaining 500 k may be converted to a tax ded debt quite quickly using a debt recycle strategy if such a thing is useable for you

ta
rolf

 

[jrc]

The important thing is how you use the money

eg borrow $1m, buy PPOR, sell IP1 for $500K, pay $500K off loan for PPOR, reborrow $500K (preferably as a new loan rather than a redraw- purely for administrative simplicity) purchase new IP, then $500K non deductible debt, $500K deductible then look at debt recycling as per Rolf's suggestion.

This would give you the same result as selling IP for $500K, borrowing $500K for new PPOR and borrowing further $500K for new IP.

 

[Scaramanga]

i would split the loan on the PPOR in two so when you sell IP you pay down one of the splits to zero, that reduces the PPOR debt to $500k, then you redraw the money from the split that was paid down to zero and to buy new ip and as now used for investment purposes it becomes tax deductible, must keep loans completely seperate

Thanks, this advice is helpful but my situation is slightly different. Apologies for not mentioning this earlier:

When I buy the PPOR, I don't intend to give the bank security over it (ie, the bank is lending me the $1m against the two IPs).

So if I sell an IP, and want to keep the loan structure in place, I have to deposit 80% of the cash proceeds with the lender to maintain the bank's security cover (and then this cash deposit funds the next IP - not tax effective). Or else, I would have to repay this portion of the loan with the sale proceeds as security is released. If I repay, then I would have to renegotiate another loan package for the next IP, which is something I would rather avoid.

I guess I could swap the security (eg offer bank PPOR, release the sold IP) but then the bank is getting a very good deal indeed (it would have $2m or so of security covering $1m of loan). At least this maintains the loan + the redraw, but I want to avoid this if possible.

Any other thoughts?

 

[Rolf Latham]

Hi Scara

really really hard to help here with dribs and drabs of info.

Not having a go, just letting u know that the feedback you get will be based on the content

Id suggest you pick up the phone and speak with a good indepenendent broker and in paralell with a decent accountant.

ta
rolf