Living Off Equity - Solution?

[flaxmac]

Hi All,

Thinking way ahead, hope the rules don't change.
Currently if you draw down for the purpose of re-investing in another IP, the Drawn Down loan amount from the IP will still be fully tax deductible.

Example:
2012
IP value = $300K (Loan $250K, Equity $50K)

2022
IP value = $600K (Loan $250K, Equity $350K)

Draw down $200K from your equity in IP, buy another IP for $200K, Keep for 12 months, then sell for $210K.

You end up with a way of drawing down while still being able to deduct the amount as an expense.

See rules from ATO: http://www.ato.gov.au/individuals/content.aspx?doc=/content/00113233.htm

My question is, do you think I have worked this out correctly?

 

[peastman]

I think you may find when you sell the IP for $210k, and keep the proceeds for your own use, the ATO will say the purpose of the original loan has changed and therefor no longer deductable.

However, if you sold the $600k IP and bought another one to replace it, the new loan would be used for investment so fully deductable, and you get to keep the proceeds from the sale of the original IP. Less original loan and CGT of course.

 

[Terry_w]

Hi All,

Thinking way ahead, hope the rules don't change.
Currently if you draw down for the purpose of re-investing in another IP, the Drawn Down loan amount from the IP will still be fully tax deductible.

Example:
2012
IP value = $300K (Loan $250K, Equity $50K)

2022
IP value = $600K (Loan $250K, Equity $350K)

Draw down $200K from your equity in IP, buy another IP for $200K, Keep for 12 months, then sell for $210K.

You end up with a way of drawing down while still being able to deduct the amount as an expense.

See rules from ATO: http://www.ato.gov.au/individuals/content.aspx?doc=/content/00113233.htm

My question is, do you think I have worked this out correctly?

No. Because once you have sold the property you couldn't keep claiming the interest associated with that property.

 

[flaxmac]

Hi Guys, and thanks for your responses.

Just so I get this straight, what you are saying Terry_W is this:

2012
IP1 value = $300K (Loan $250K, Equity $50K)

2022
IP1 value = $600K (Loan $250K, Equity $350K)
Draw Down $200K to purchase IP2
Results IP1 value = $600K (Loan $250K attributed to IP1, Draw Down $200K attributed to IP2, Equity $150K) All loan interest tax deductible.

2032
IP1 value = $1,200K (Loan $250K attributed to IP1, Draw Down $200K attributed to IP2, Equity $750K)
IP2 Value = $400K
Draw Down $500K to purchase IP3
Results IP1 value = $1,200K (Loan $250K attributed to IP1, Draw Down $200K attributed to IP2, Draw Down $500K attributed to IP3, Equity $250K) All loan interest tax deductible.

But from here if I sold IP2 I would not be able to deduct the first Draw Down of $200K on IP1.

Well things are going to get pretty messy, aren't they.
Imagine what a nightmare this will be for people who have done this on a much larger scale every year or two over 20 to 30 years time....

 

[Terry_w]

When you increase a loan and use the funds to buy property B if you later sell property B you cannot keep claiming interest on the loan increase as what is the purpose those funds were used for?

It shouldn't be messy at all.

 

[flaxmac]

Hi Terry_W,

Thanks for the reply.

Let's take a PPOR example then,

2012
I buy PPOR for $500K, ($100 deposit, $400K Loan).

2022
Value of PPOR is $900K (Loan $400K, Equity $500K).
I draw down $300K giving (Org Loan $400K, Draw down Loan $300K, Equity $200K).

2023
Decide to rent it out for 5 years as an IP (whilst still claiming as my PPOR)

Question: Is the full loan of $700K deductible or only the Original loan of $400K ?

 

[Terry_w]

Hi Terry_W,

Thanks for the reply.

Let's take a PPOR example then,

2012
I buy PPOR for $500K, ($100 deposit, $400K Loan).

2022
Value of PPOR is $900K (Loan $400K, Equity $500K).
I draw down $300K giving (Org Loan $400K, Draw down Loan $300K, Equity $200K).

2023
Decide to rent it out for 5 years as an IP (whilst still claiming as my PPOR)

Question: Is the full loan of $700K deductible or only the Original loan of $400K ?

There are 2 loans:
1. $400,000 which was borrowed to purchase the property, and
2. $300,000 which was borrowed for???

Loan 1 would be deductible if the property is rented as it relates to the borrowing of money to generate income.

Loan 2 would be deductible if you borrowed the money to extend the house, but not deductible if you purchased a new home to live in etc

If loan 2 was used for an investment property it would be deductible, but if you sold this investment property the proceeds from the sale must be used to reduce this loan - if there is a shortfall you could continue to claim some of the interest in some cases.

 

[BMan]

3. use a trust setup to to borrow money to be tax deductible

 

[Terry_w]

3. use a trust setup to to borrow money to be tax deductible

How does that work?