IP Equity to PPOR - interest claimable??
- Thread starter lowie
- Start date
Hi Lowie
The equity loan is being used for non ded purposes.
Not much can be done without some major surgery
ta
rolf
The equity loan is being used for non ded purposes.
Not much can be done without some major surgery
ta
rolf
The answer to these Qs is always the PURPOSE test. Borrowing for private expenses = non deductible.
Options:
1. Just accept the fact that the equity draw from an IP to fund a PPOR is not tax deductible.
2. Save for a PPOR - a novel idea I know.
Options:
1. Just accept the fact that the equity draw from an IP to fund a PPOR is not tax deductible.
2. Save for a PPOR - a novel idea I know.
part sale to or from spouse, full sale to a HDT or a unit trust, and a bit of footwork for the new purchase
Where poss, the major cost is the stamp duty, and the"surface" payback varies from a year to 3 to 5 years on average
ta
rolf
back to my original Scenario
My IP is worth: $300K with an original loan of $150K, I maximise my loan and draw equity of $150K.
The IP was my original PPOR and now its currently being rented out. I am just wondering as i have only borrowed $150K and the rest of the money is technically my money right? and i would assume as the IP is for investment purpose that I can claim all $300K now?? or am i thinking too much???
My IP is worth: $300K with an original loan of $150K, I maximise my loan and draw equity of $150K.
The IP was my original PPOR and now its currently being rented out. I am just wondering as i have only borrowed $150K and the rest of the money is technically my money right? and i would assume as the IP is for investment purpose that I can claim all $300K now?? or am i thinking too much???
the answer is still no
ta
rolf
ta
rolf
If you sell the IP it is your money but you are talking about borrowing money. If you borrow another $150,000 deductibility will depend on what you use this money for. If you pay it into a PPOR loan it would be a private expense.
maybe, can be done I understand
but there are issues to consider if the new place will be mainly a PPOR
ta
rolf
but there are issues to consider if the new place will be mainly a PPOR
ta
rolf
Not if the trust is a discretionary trust. This is because you will have no fixed interest in the trust and so there is no guarantee that you would get a return if it is at the trustee's discretion on who they distribute to.
So i guess the only way I can claim full deductions is if I loan it to a trust? correct me if I am wrong, but would this be through a unit trust? Also would it matter if the trustees were myself and my mrs? or would it be better to be via a company?
If my mrs and I were to get another loan (loan B) together on top of my own loan (loan A i.e. $150K) and then loan it to the trust, would the interest incurred on the be deductible as well?
Would I need to rent the property from the trust and would the ATO treat the property as being owned by us or the trust?
If my mrs and I were to get another loan (loan B) together on top of my own loan (loan A i.e. $150K) and then loan it to the trust, would the interest incurred on the be deductible as well?
Would I need to rent the property from the trust and would the ATO treat the property as being owned by us or the trust?
Hi Lowie
I know we will keep providing you with generalities.
Please, before you make any decision on anything, run it past an accountant that knows what they are doing
ta
rolf
I know we will keep providing you with generalities.
Please, before you make any decision on anything, run it past an accountant that knows what they are doing
ta
rolf
Not really correct.
If you loan $100 to the trust you would be charged $7 interest pa. To be able to claim this $7 as a deduction would have have to charge the trust at least $7 in interest. Otherwise there is no commercial point and it would be a scheme to save tax. So $7 in expenses and $7 in income = no point.
What you could do is to borrow to buy units in a unit trust. If the trust is set up so that you as the unit holders get all the income and capital gains then you could probably claim 100% of the interest on the money borrowed to buy these units.
If you were to do this the trustee and the unit holders could not be exactly the same. It would be best to have a company as trustee for a number of reasons, but this will complicate things as well.
There are also a whole heap of other issues you need to consider.
If you loan $100 to the trust you would be charged $7 interest pa. To be able to claim this $7 as a deduction would have have to charge the trust at least $7 in interest. Otherwise there is no commercial point and it would be a scheme to save tax. So $7 in expenses and $7 in income = no point.
What you could do is to borrow to buy units in a unit trust. If the trust is set up so that you as the unit holders get all the income and capital gains then you could probably claim 100% of the interest on the money borrowed to buy these units.
If you were to do this the trustee and the unit holders could not be exactly the same. It would be best to have a company as trustee for a number of reasons, but this will complicate things as well.
There are also a whole heap of other issues you need to consider.
Are there any pros or cons to using a unit trust? and by using a company as the trustee?
If the company was the trustee, then the company would need to be setup as my mrs and i being the directors/shareholders.
In terms of claiming expenses of the property, would that all fall under the trust then?
Yes, many pros and many cons.
Ideally a company as trustee will give asset protection and more flexibility. The company should really only have one director to reduce risk and the shareholder should be a discretionary trust ideally, but could be you and wife. The unit in the trust should be held by the persons who wish to claim the interest.
Cons:
- land tax free threshold gone, (in NSW if the unit trust is fixed it may be available)
- CGT free status of home gone.
- you would end up paying tax on rent you pay your trust (as rents rise).
- complex legally
- complex tax
- additional regulation by ASIC
- extra fees
- ATO issues if renting from your own trust.
Pros:
- You may get to claim some more interest
- Trust could convert to discretionary later.
- units could be transferred to SMSF later
- control could be passed without changing title
- units could be transferred to a third + person, such as children.
- trustee could borrow to buy units off you resulting in extra tax deductions.
If the trust owns the property the trust would be claiming deductions. But you would be buying units so could claim the interest on the units in return for the income from the rent.
Ideally a company as trustee will give asset protection and more flexibility. The company should really only have one director to reduce risk and the shareholder should be a discretionary trust ideally, but could be you and wife. The unit in the trust should be held by the persons who wish to claim the interest.
Cons:
- land tax free threshold gone, (in NSW if the unit trust is fixed it may be available)
- CGT free status of home gone.
- you would end up paying tax on rent you pay your trust (as rents rise).
- complex legally
- complex tax
- additional regulation by ASIC
- extra fees
- ATO issues if renting from your own trust.
Pros:
- You may get to claim some more interest
- Trust could convert to discretionary later.
- units could be transferred to SMSF later
- control could be passed without changing title
- units could be transferred to a third + person, such as children.
- trustee could borrow to buy units off you resulting in extra tax deductions.
If the trust owns the property the trust would be claiming deductions. But you would be buying units so could claim the interest on the units in return for the income from the rent.
Hi Terry, can you please explain the above??
Also is it worthwhile having this kind of structure when essentially I only will be having 2 properties in the short term??
On a $150K loan, the interest would be around the $10K mark or so anyway. Just not sure it is financially worth it, as at the end of the day, the 2nd property may become another IP anyway.
