IP - loan balance or otherwise for negative gearing

[pcyc]

Dear forum members

I'm a newbie and appreciate any veteran or expert to advise me. Here's my situation.

My wife and I have a house in Melb as PPOR. The property is worth $600K and our remaining loan is $300K.

I'm planning to move to 2nd house in another suburb as PPOR and rent out this 1st house. Rental will be less than interest payable.

I plan to draw down equity in my 1st house to pay for 2nd house. Refinancing up to 80% of $600k = $480K. Additional fund = $480K - $300K = $180K to pay for 2nd house deposit.

My questions are:

1. Can I use the refinance figure of $480K or the latest loan balance of $300K as my negative gearing component? I have checked with two separate accountants and they both gave me different answers. One said you can only use the latest loan balance of $300K - this is the only legal option by ATO. The other said you can draw down to $480K provided that you do so prior to converting the PPOR to IP - is this legal? If so everyone in Aus will be drawing down to 80-100% of their fully owned house to max negative gearing?

2. Another option I have been advised is to ask the partner to sell her portion of 50% share to myself. This will give me 50% of $600K = $300K new loan on top of my current loan portion (50% of $300K = $150K). Total = $450K to be claimed as negative gearing. This will need to be done with a lawyer about $2K in fee - this apparently is legal. If the couple split the family office will still divide the house 50% equally regardless if the wife has sold that portion to the husband. The purpose is to max negative gearing.

Appreciate your views.

cheers - PCYC

 

[Aaron_C]

1. No only the $300,000 will be an allowable deduction because it is the purpose of the funds which determine deductibility, not the security. You are using the money to buy a PPOR - private expense, no tax deduction.
2. Yes that can work but only for the negative gearing on the original property. There are some potential issues with anti-avoidance etc but a lawyer would have to advise you on that one.

 

[dan c]

Re: Question 1, the first accountant is correct. Only the interest on $300,000 is deductible.

Interest deductibility is determined by the purpose ofthe loan, not the security attached to the loan. The $300k was used to buythe house which will become the IUP, so ir deductible. The extra $180 is used to help buy your new PPOR, so is not deductible.

 

[pcyc]

Thanks Aaron and Dan

I have always thought that the legal way is the $300K and the purpose of loan test applies.

Apart of Option 2 mentioned, would you have any other ideas of maximising the negative gearing option based on my current loan of $300K?

Another option I thought is to sell out this house and just buy a new PPOR. Then later buy an IP with properly set up loan structure. However this is less appealling as there's the stamp duty component of purchasing a new IP.

I regret that no one told me about the loan setup when I bought my first house, otherwise I'd have set up 80-90% loan, interest only and with an offset acc. Not sure if I'm the only one who have gone through this hoop and found out later.

Thanks - pcyc

 

[dan c]

I regret that no one told me about the loan setup when I bought my first house, otherwise I'd have set up 80-90% loan, interest only and with an offset acc. Not sure if I'm the only one who have gone through this hoop and found out later.

No, you're certainly not the first, and you won't be the last.

The costs of selling and buying somewhere else are high, so I'd be doing my sums before I did that.

I'd be asking what's the best way to maximise INCOME. Is the current property likely to rent well, the prospects for capital growth etc., compared to the extra gearing available by buying a new property.

 

[Rolf Latham]

I regret that no one told me about the loan setup when I bought my first house, otherwise I'd have set up 80-90% loan, interest only and with an offset acc. Not sure if I'm the only one who have gone through this hoop and found out later.

Thanks - pcyc

u aint alone

there are 10 000s of thousands like you, and many more that are blissfully unaware.

If the security is in Vic a spousal sale may work for you with neligible transaction costs, and in an ideal world will allow a reasonable regearing of the asset

Else a 105 % lend and sold to a unit trust can work, but wil cost a bomb in gov fees

ta
rolf