Ip-ppor tax question

[new2this]

Hey guys,
Going through possible strategies forward and have a question.
If I get a loan against ip1 ( valued 150k no debt) IO and put in offset and then use as deposit for IP3 which I'll be renting out for maybe 2-3 yrs with the interest on the loan against IP1 being tax deductible and then make IP3 my ppor what affect does it have on the tax deductibility on IP1? I'm assuming it loses it. But want to make sure I won't owe past tax deductions?? If I just lose tax deductibility I'll pay this loan down ASAP before focusing IP3 which will eventually become ppor. Which case IO loan would be pointless. Open for any better suggestions of course.

 

[Terry_w]

First of all you would probably lose deductibility of interest if you borrow, park the money, mingle with cash and then use it to invest.

Secondly it is the purpose and use of the money that matters. So, assuming you could trace the borrowed money you look at what it was used for - if used to buy a property which will be a main residence then there is no possibility of claiming interest.

If you pay down a loan on an investment property then this will leave less cash for your new PPOR. This may mean less tax deductions and more non deductible interest.

 

[new2this]

Thanks Terry, I understand what you are saying but I'm wondering if I take the loan from IP1 and use for IP3 which would be an income producing asset at first then it would be tax deductible but what happens if in say 2-3 yrs time that IP becomes my ppor would that mean my initial loan on IP1 which funded the deposit on my now ppor is no longer tax deductible ( I'm pretty sure this is the case) I'm just not sure if the tax deductions I've made while it was an IP are now somehow owed? ( not sure if I'm making any sense) and then the problem of course of having a loan against an IP that's no longer tax deductible which is why I would pay it down aggressively, I'm just thinking I can buy my ppor now at today's prices instead of saving while watching property go up in value. ( still not sure if I make sense) Thanks again

 

[Terry_w]

Not sure I understand fully, but

Property A
Borrow against this, park in offset, later use to fund deposit on property B

Property B
Investment

Assuming you can trace the funds (which I think you cannot) then interest on the money borrowed against A to fund B may be deductible during the period that B is used for an investment property.

Once B becomes a main residence then the interest could no longer be deductible.

 

[new2this]

Cool Thanks Terry, That's what I needed to know, so in this scenario would you think paying down the debt on IP1 that was used for property B first would be the best way to go? Or would you recommend just avoiding this situation all together? And maybe saving 5- 10 percent and paying LMI on the IP-PPOR and just use IP1 to buy IP4? Or if you have better advice I should probably be paying for this information, Thanks

 

[Terry_w]

Well if B will be an owner occupied you would be best to avoid LMI if possible as it wouldn't be deductible (except maybe while an investment property).

I would not park the money in the offset, but set up a LOC on property A and use that for the purchase of property B. Once you move into B then it may be better to pay off this LOC as fast as you can - if B is going to be your main residence for a long time.

Have an offset on A now, but change it to B later when you move in. Saves you non deductible interest.

 

[new2this]

Kk I'll be looking into LOC, no need for offset on A as I already aggressively paid it down to 0, with the beauty of hindsight I probably shouldn't have but was keen to own something outright. Won't be making this mistake on IP2. Many thanks Terry.

 

[Colin Rice]

Ok to use an offset as long as it is dedicated to IP debt and not mixed with personal use. Many lenders will allow multiple offsets so easy enough to have one for personal and one for investment.

If my quick skim interpreted your questions correctly the debt on IP1 & IP3 will be deductible as long as the purpose is investment but once it becomes PPOR will be non deductible.

If you use the SVRs and LOCs correctly you should be able to convert the debt to deductible again if your situation changes, as long as it is managed correctly and not contaminated by mixing personal and investment use.