Is this how it works guys?

[Spudman]

Hi Guys

Totally new to the investment game, so am totally open to suggestions.

We currently have a 4 x 2 house in Pearsall, WA - estimated price of $490,000 and we owe $90,000. We would love to move closer to the sea and perhaps a smaller house with less garden, maitenance etc.

Question: is it possible to use the equity in our current house to purchase a newer more expensive property, move into it and use our existing house as a rental property for tax purposes.

Currently from what I can make it out 4 bedroom houses currently rent for about $450 per week in Pearsall. We currently are paying $300 per week on our mortgage so assuming we take the total of both ($750) this in theory would be the maximum repayments we can handle without affecting our current lifestye - correct??

Anybody got any links, information etc that you could point me towards, many thanks in advance.
Spud

 

[Spudman]

Sorry guys just realised I may have posted in the wrong area but don't know how to move it - mod can you do so please??
Spud

 

[RumpledElf]

Sure you can use the equity as a downpayment on a new house!

But the catch with having your old house with such a small debt is you'd end up with a rather big debt on your new PPoR. The $90k is all that's deductable, so its really not good for tax at all.

Usual advice in this situation is to sell the old house and use the spoils to buy a new IP and PPoR with the smallest possible debt on the PPoR and largest possible on the IP, for tax reasons.

 

[craigb]

i second that , very good RE,

 

[Rixter]

Hey Spud.

Welcome to the good ship SS Forum. Setting 'sale' to your dream destination.

Yes you can borrow against your current ppor (subject to serviceability) to purchase another property and move into it.

The interest on the new borrowings will not be tax deductible. The interest on your existing ppor once it becomes a IP will become tax deductible tho.

However ideally you should have the largest debt against your IP but in your case it will not be. Your finance will be face about.

In determining interest deductibility the ATO look at the purpose of the drawings not whats used to secure the drawings. Drawings for income producing purposes is deductible, drawings for personal purposes (ie ppor, holiday, boat, car etc ) is not.

Do you understand what I mean?

 

[Spudman]

cheers guys, really appreciate your quick response, so it looks like I might be looking at buying 2 properties and selling the one I'm in.

The amount of fees in doing this scares me though

 

[Spudman]

PPoR?
Anybody point me to a list of abreviations?

 

[Belu]

PPOR = Primary Place Of Residence.

Basically if you own a house and live in it then it = PPOR as opposed to IP (Investment Property)

 

[RumpledElf]

The amount of fees in doing this scares me though

Depends how much you want to avoid tax. You could always keep the old one as is and just plough the rent you get into your PPoR. If you're planning on staying in the new PPoR longterm, put it straight in the loan. If you have even the vaguest inkling of making it an IP later, get an offset account and put extra payments in there instead.

End of this year (if we can get a loan) I'm going to have two IPs with ~30% loans and a PPoR we'll be borrowing the full amount for (although will also end up at 30-40% LVR on completion as it is a new build on land owned outright) so the biggest debt will be on the house I live in - not good for tax. But we are lowish earners so tax isn't really an issue and it is nice having the rent cover all your IP and PPoR expenses.

Acronym alert: LVR is loan to valuation ratio. So if you have a $90,000 debt on a house worth $100,000 your LVR is 90%.

 

[little_stranger]

Spudman

There's a handy list of Somersoft acronyms here:

http://www.somersoft.com/forums/showthread.php?t=9382