Loans on Owner Occupier and Investment Properties

[Evergreen]

Hi,

I have a scenario on a property that I would like feedback on.

Let's say a property was bought in the individuals name for $500k with a $400k loan, and has been lived in as owner occupier since bought.

Now several years later the property is worth $1 mil, and the owner is moving out and making it an investment property. Doesn't want to sell as is too good an investment.

The owner then buys another property for $600k to live in requiring a loan value of $480k. When buying this property, takes out a $80k loan on the new property and increases the loan on the old property by $400k to $800k.

Can the owner then negative gear the interest on the full $800k going forward? or can you only ever use the interest on the original loan value on the property as future tax deductions?

Thanks

 

[Peter_Tersteeg]

The original $400k on the old property should be deductible because the purpose of that money was to purchase a property which is now an investment.

The increase of another $400k (to a total of $800k) probably wouldn't be tax deductible. The purpose of that increase was to purchase a new owner occupied property which is not a deducible purpose.

It generally doesn't matter which property the money is borrowed against, but what the money is used for that determined destructibility.

 

[Evergreen]

Thanks Peter.

So it is only the original loan amount used to purchase the property that can be used for negative gearing. I thought that maybe because it was not an IP at the time of buying, that the value of the property when it became an IP could be used as the price and therefore any loans on the property when it became an IP could be used (ie. topup before buying second property)? So it is about when it was purchased rather than when it became an IP?

If that is the case, then this leads to my next question. What if the owner transferred the property to a trust? I know they would pay stamp duty but that may be worth it long term, especially if the potential rent is way above the interest for the current loan. Then the trust could borrow a higher amount on purchase to make it a neutral investment (eventually positive)

This would also then give the owner the cash to buy the owner occupier with a much lower loan (and lower non deductible interest).

So rather than having a highly positive geared IP where the owner is paying tax on the income and then high interest payments on the PPOR loan, the owner has low interest payment on the PPOR and a neutrally geared IP in a trust. Do you have any feedback on this approach?

 

[Terry_w]

Deductibility depends on the use the funds are put to. If funds are borrowed to acquire an income producing asset then the interest would generally be deductible. Increasing loans won't make the extra interest deductible unless the extra funds are used for investment/business.

A transfer to a trustee is a sale and if the trustee borrows to buy the property then the interest would be deductible to the trustee. New loans would be needed as ownership is changing.

 

[Evergreen]

Thanks Terry. Appreciate your input