Is This Legitimate? I've Been Told About This Term, "The Intent Used For"

Hi Everyone, sorry for the mini essay below to state my scenario.

I have a scenario which I believe could be quite common. I thought it was logical but have been told initially by my bank manager that it MAY not be ok and my tax accountant today says it's NOT ok. Here goes with made up figures:

1) Currently live in a principle residence valuated at $400,000 with $150,000 still owing, therefore have $250,000 in equity. $300 per week rental potential.

2) I want to upsize to a bigger house which costs $800,000. Instead of selling my existing $400,000 house, I want to convert it to an investment property.

3) This would then mean I have $950,000 total in loans. I will be taking out new loans to finance both homes via two separate loans.

4) I thought that I could formulate my loans using my $250,000 equity in my exisiting house. Have my existing house loan created at $400,000 for investment purposes and $550,000 loan for the new principle residence. I was hoping to do this to maximise negative gearing.

5) But I have been told this is not ok due to the intent of the usage for the $250,000 equity for non-investment purposes and cannot be claimed for negative gearing purposes. This is going to kill me a little if all I can claim is the existing $150,000 loan as it will be massively postively geared.

6) An argument is, what is the difference if I sold my existing house with $250,000 cash difference, bought my $800,000 with a $550,000 loan and then purchased a house for investment purposes for $400,000?

7) Does it make a difference if I'm creating new loans for each property?

8) Bank manager willing to change loans to what I want.

9) Could I get a second opinion from a different specialist? Financial adviser?

Many thanks in advance for any advice!
 
So you reckon you are going to get better free advice from people you don't know, who know nothing about you, than that which is offered by two professionals?

Trust your accountant. He is right. (as far as I know).

Re-reading that I bet a pedant accountant will "prove" me wrong, but remember it is YOU who signs off your tax return.
 
This issue gets raised regularly in the forums. The problem you have is the purpose for which you are using the money - for interest to be deductible the borowing must be for the purpose of gaining assessable income. The ATO isnot concerned with which property is used as security for the loan, but how the borrowed monies are used. From the ATO aspect it is simple, even if you refinanced with another bank. You owe $150 on your soon to be IP, interest on those borrowings is tax deductible. Any additional borrowings on that property are to be used to purchase a PPOR, so not tax deductible.

Yes you could sell existing property, buy new PPOR and then borrow for another IP and the interest on those borrowings would be tax deductible.

You may be able to increase the borrowings on your existing PPOR eg if yu own jointly, the spouse with the biggest tax rate borrows and buys half. So A borrows $200K to buy out B, B pays back $75K (half existing loan) total borrowings that could have interest claimed $275k

You're in Vic, so I think there is an exemption on stamp duty for transfers between spouses. So do we go an extra step B buys out A instead and then A buys whole property from B? The scenario in the previous paragraph has been allowed by the ATO in a PBR, the second step might indicate the transfers have been done purely for tax benefits and be challenged by the ATO.

Leaving aside your non cash deductions, if you rented your existing house $15600 rent, less say $7500 interest, say $4000 other expenses, taxable income $4100. If you were able to get all the value of your house borrowed tax deductible you would be paying $20K interest and have a loss of $8400. The difference is after tax say $2400 in first instance and being out of pocket after tax about $5000 - net difference $7k. If $7K is going to kill you a little then a .875% pa interest increase on your additional borrowings of $800K will have a similar effect. Maybe you should sell and invest in another IP later
 
trust your accountant dude - he knows what he is talking about. You can only claim the interest on the $150k owing. You get one shot at getting the loan structure right and you have already rolled the dice on that property.

jrc raised some good ideas to think about.
 
Thanks everyone for your info and advice so far!!!

So you reckon you are going to get better free advice from people you don't know, who know nothing about you, than that which is offered by two professionals?

Trust your accountant. He is right. (as far as I know).

Re-reading that I bet a pedant accountant will "prove" me wrong, but remember it is YOU who signs off your tax return.

Hi Sunfish, I was hoping someone from this common scenario may have been in the same situation or provide me with a type of specialist that may help. Any info I could gain may make me in more effective in comms.

You may be able to increase the borrowings on your existing PPOR eg if yu own jointly, the spouse with the biggest tax rate borrows and buys half. So A borrows $200K to buy out B, B pays back $75K (half existing loan) total borrowings that could have interest claimed $275k

You're in Vic, so I think there is an exemption on stamp duty for transfers between spouses. So do we go an extra step B buys out A instead and then A buys whole property from B? The scenario in the previous paragraph has been allowed by the ATO in a PBR, the second step might indicate the transfers have been done purely for tax benefits and be challenged by the ATO.

Leaving aside your non cash deductions, if you rented your existing house $15600 rent, less say $7500 interest, say $4000 other expenses, taxable income $4100. If you were able to get all the value of your house borrowed tax deductible you would be paying $20K interest and have a loss of $8400. The difference is after tax say $2400 in first instance and being out of pocket after tax about $5000 - net difference $7k. If $7K is going to kill you a little then a .875% pa interest increase on your additional borrowings of $800K will have a similar effect. Maybe you should sell and invest in another IP later

I am married but the current house is only in my name as I bought it before we got married. So your creativity regarding buying and paying back may not work for me?

Your calculations makes a lot of sense. Thanks a lot for that. When I said the term 'kill me', I was meaning it would pain me to pay tax on rental income at my tax bracket. But they do say, if you pay more tax, it means you're also more money. :)

I have paid out of my own money over $30,000 in advance in addition to the loan repayments tabled at the commencement of the loan. I'm assuming I should be able to redraw this amount without problems? I've been paying extra over a period of 7 years.

trust your accountant dude - he knows what he is talking about. You can only claim the interest on the $150k owing. You get one shot at getting the loan structure right and you have already rolled the dice on that property.

jrc raised some good ideas to think about.

It's really great to have people provide info that I can then explore further. Cheers.
 
What is your wife's income? You could explore selling the house to her (should be CGT and stamp duty free) - then the rental income received would be at the lower tax bracket (assuming she earns less than you).

I think the redraw idea you have raises the same issue- what are you going to use that money for? To purchase another PPOR - so the redraw amount is not tax deductable!
 
noisuf. You're new to the forum but I call 'em as I see 'em. No exceptions.

Trust me! LOL (No. I'm not a doctor!) Trust your own instincts, not the common wisdom here, and trust your paid professionals. If you think they are letting you down change but never assume that because they are accountants they have "no idea".
 
So you reckon you are going to get better free advice from people you don't know, who know nothing about you, than that which is offered by two professionals?

Trust your accountant. He is right. (as far as I know).

Re-reading that I bet a pedant accountant will "prove" me wrong, but remember it is YOU who signs off your tax return.

You would think an accountant is right !!!
We thought ours was right also. Not we have been audited, and then on our own, found errorrs that were 5X worse on the subsequent tax return.
It is a nightmare now.Should be fixed dhortly...fingers crossed.
Expect we will need to pay back thousands $$$$.
 
That's bad news Kath. Sorry to hear it.

But can you, absolutely, in spite of having no insurance, give better advice than that already offered?
 
I have paid out of my own money over $30,000 in advance in addition to the loan repayments tabled at the commencement of the loan. I'm assuming I should be able to redraw this amount without problems?
I think the redraw idea you have raises the same issue- what are you going to use that money for? To purchase another PPOR - so the redraw amount is not tax deductable!
Agree with rprodrive. You have to get advice to set up even your PPOR loan as I/O plus full offset account from day 1, in case you ever want to turn it into an IP.

My proposal for simplifying the tax system: you should be allowed to claim interest on debt up to the purchase price of all your investments, regardless of the order you bought them in, which debt was taken out at which time and what it's secured against etc.

So if you have total debt of $800K, and all of it was for investment in shares and property except that you borrowed $200K to buy your PPOR some years ago, then you should be allowed to claim interest on $600K of debt. Simple, and much fairer!
 
I have paid out of my own money over $30,000 in advance in addition to the loan repayments tabled at the commencement of the loan. I'm assuming I should be able to redraw this amount without problems? I've been paying extra over a period of 7 years.

If you haven't paid this into an offset you will be redrawing money on your mortgage not for the purpose of investment but for buying a new PPOR so there will be no deductibility on the interest on the redrawn monies.

You seem to be discontented with the answers you have got from your accountant and from this forum (which happen to reflect the current taxation law in Australia). You can always go and find someone who has no understanding of income tax law in Australia (unlike your accountant) or will tell you whatever you want to hear ( and charge you a fee).

Just remember we live in a self assessment taxation regime where the onus is on the taxpayer to get it right. The ATO has good data matching capabilities. In any event how much rocket science is it going to be for them to look at your tax return and see that you have moved and are renting out your previous residence since this information will be shown in the tax return - your address on the front page and that of your rental property in the schedule they will ask you to fill out.
 
Hey Sun, that was kind of tough! :eek: When we had some queries about the CGT on an Investment property, thanks to this forum (Mry and others - I cant go back far enough on the search thing to check) I found out that our Accountant had wrong to the extent of $15,000 Tax we DIDNT have to pay. When I told him of his error the Accountant said I was stupid to trust the advice of people on the internet and to ignore it. Then, again thanks to one of these anonymous people, I was able to give him a copy of the relevant ATO legislation. So, while I hear what you are saying, the people here can at least give you the heads up on where to find out the truth.

And hey Sunfish, even you have given me some good advice along the way!:p
 
Sell the house. Sell it to your wife, or sell it to me, but definitely sell it.

Then pay as much cash towards your new PPOR.

Then buy a new IP using the equity, so you have a loan at 105% of purchase price. Then negative gear to your eyeballs, when your debt is practically the same as it will be anyway.

If you intend on keeping the IP for the long term (10 years plus), you'll thank me for this advice :D

The extra $270K loan on the IP will be good for $19K in interest deductions per year (at long term average of 7%), which even at 30% tax will net you a return of $5700 per year. This will quickly over take the $30K in changeover costs to sell one property and buy another.

Like I said, only if you're keeping it for long term...
 
Some thoughts, but definitely not advice...

1) Sell to wife, as others have commented. There's no stamp duty in Vic.

I can't imagine you'd get away with her selling it back to you in about a year's time, at least not without an absolutely genuine reason, such as for example your wife suddenly becoming a very real risk of being sued, so she desperately needed to offload her assets to you.

2) Read the threads on capitalised interest, it might give you some ideas on how to (very slowly) make more of your old-PPOR's debt tax-deductible.

Cheers
Jonathon
 
Thanks so much everyone for the suggestions that allows me to further explore. It's great to see that a situation could be cut and diced so differently.

Missed out on auction over the weekend so will continue looking.

Not sure if it's the right time to find a place at the moment with prices close to record highs in Melbourne.
 
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