Investment Property Subdivision & Debt Reduction

Hi there,

I am looking at purchasing a residential investment property on a double block of land. My aim is to subdivide the property and create two 16 perch lots. I will sell the vacant lot and retain the investment property for some time.

My question is, will I have to reduce the debt obtained to purchase the property (and fund the subdivision) with the sale proceeds of the vacant lot?
Or can I pay the proceeds off my current non-deductible home loan?

If I reduce my own home loan with the proceeds I will be left with an investment property that is worth approx $360,000 with a deductible debt of approx $460,000. Would the ATO have a problem with this as long as I pay the relevant CGT on the sale of the vacant lot?

Any help would be appreciated.

Regards

Brad
 
Hi Brad

I cannot see that the ATO would require you to use the proceeds of the sale of the subdivided block to pay down the loan as the purpose of the loan would be for income production - which you are still continuing to do with the remaining income producing property.

I am sure someone like Dale could clarify this for you - Dale?

I personally would also be interested in a more informed opinion on this topic as it is something I am also considering.

BTW - I am not a tax adviser, so usual disclaimers apply.

Regards

Laurie
 
HI

There are two separate transactions involved in this scenario. The first is the sale of property which will attract the interest of the tax office as tax will be paid on the profit made.

The second transaction is what you do with that money after the sale has taken place. The tax office do not like the idea that you can choose not to pay off the loan and have shown a willingness to fight in different, but not dissimilar, circumstances.

I am afraid that there is no easy answer to your question. You are legally right to do with the money once it is yours and subject to the bank not wanting you to reduce your debt, you can use the surplus funds where you want. Obviously, if you use those funds to buy more investments, there can be no argument. However, if you use those funds for personal purposes . . .

Traed carefully

Dale
 
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