Making your PPOR loan deductible?

[spludgey]

I went to a property meeting last night and got an idea about reducing my non-deductible PPOR loan and essentially slowly converting it into a deductible loan for investment purposes, using my PPOR as security.

I have in the past heard about using a line of credit to pay your expenses, but I never quite got it. Is this what it's all about? Have I just reinvented the wheel?

My idea is to have all my income going into my PPOR loan. This includes renal income from IPs and salary. I then open up a line of credit which I use to pay all my IP expenses like rent, insurance, council rates, etc.

As I'm paying off my PPOR loan, I increase my LOC, shifting from a non-deductible loan to a deductible one while maintaining a total LVR of 80%.
Once my PPOR loan is paid off, I convert the entire loan from a LOC to a standard loan.

Will this work?

My actual case is a little bit more complicated, as I have a fixed loan against my PPOR and an offset account, plus I don't think that my lender does LOCs, so it might have to be a second fixed or variable loan with its own offset account. This will make it a little bit more difficult to increase my deductible loan once my funds in my secondary offset are depleted, but the theory is the same.

 

[Peter_Tersteeg]

The common term for this process is debt recycling. It's been around for as long as tax deductible mortgages have been around.

You don't necessarily need a LOC, this is simply a product. Other products can meet the requirements to do this.

 

[Paul@PFI]

It might. However, be aware that there are (were ?) some packaged versions of this arrangement that can fail where the LOC is intended to be run up while the PPOR benefits from rapid preferential repayment. The ATO calls these split loan facilities. Most lenders ceased to offer these facilities.

Arguably the more you target this type of benefit the more it may seem a scheme to obtain a tax benefit. A private tax ruling may be required as a safeguard against a future problem. If I ask Why are trying to do this and you say to increase tax deductions then there is a concern. Bear in mind $20K of increased debt equates to a increased refund of up to $425 so its a small issue IMO. You need to rack up a huge debt to make a impact. Do you or your bank want that ?

Have you considered just asking the bank for a year of prepaid interest ?? This could bring fwd a whole year of interest deductions (double deduction in first year) and be a whole lot less hassle. The catch is you must prepay every year thereafter. Prepaid interest is a fixed rate product - speak to your broker/bank now as they have a May cutoff in most cases.

Some NSW and Vic land owners can also do a spouse refinance and change of ownership (typically from one spouse ownership to joint) and bypass stamp duty and refinance. The increased loan is used to payout the former owner and then used to buy a PPOR. Hence it converts non-d debt to deductible.

 

[peaches]

The catch is you must prepay every year thereafter.

You mean from a tax advantage point of view rather than lender's policy.

 

[peaches]

Sorry forgot to mention - make sure you don't claim any capitalised interest. I would get some good advice before you proceed - BANTACS have an interesting series of articles on this.

 

[neK]

My question for you is what happens if you decide that one day you want to move into a bigger house and make your current PPR into an IP?

 

[Terry_w]

My question for you is what happens if you decide that one day you want to move into a bigger house and make your current PPR into an IP?

Best to modify slightly - instead of paying down the PPOR loan pay into an offset account.

 

[neK]

Best to modify slightly - instead of paying down the PPOR loan pay into an offset account.

I was thinking the same.

But then he wouldn't be able to do his debt recycling and increase his deductible debt... unless he obtains a LOC (assuming the PPR increases in value). Would this not be the case?

 

[Terry_w]

I was thinking the same.

But then he wouldn't be able to do his debt recycling and increase his deductible debt... unless he obtains a LOC (assuming the PPR increases in value). Would this not be the case?

Yes, would need a bit of equity to start off. And then it becomes a choice - use offset to invest or pay down loan and reborrow.

 

[neK]

Thanks for clarifying it Terry!

 

[spludgey]

Best to modify slightly - instead of paying down the PPOR loan pay into an offset account.

But you can only have a combined LVR of 80%, so if you put it into an offset, in my example you couldn't get a LOC of more than 40%, effectively making your LVR 40%.

My question for you is what happens if you decide that one day you want to move into a bigger house and make your current PPR into an IP?

I'd never turn my PPOR into an IP, if I ever move, I'll sell. Yields here are terrible.

Sorry forgot to mention - make sure you don't claim any capitalised interest.

So I can't capitalise interest from the LOC onto the LOC and claiming it? How is this really different from paying interest for loans on the LOC?

 

[Terry_w]

But you can only have a combined LVR of 80%, so if you put it into an offset, in my example you couldn't get a LOC of more than 40%, effectively making your LVR 40%.

This may be the case initially.

But values will hopefully increase.

e.g. start off with $100,000 value. $80,000 PPOR loan.

Later value $120,000 so you could set up a LOC of $16,000.

 

[Rolf Latham]

"Proper" debt recycling using the appropriate structures and income producing assets, at the right time is (currently) a legitimate form of tax minimisation and wealth creation.


ta
rolf

 

[remingbi]

If one was to borrow 200k from ppor, a seperate split loan and invest into shares via a seperate margin loan and allow the interest to capitalise
1. I assume the 200k would be tax deductible
With the dividends, can they be pd back straight into ppor loan as a gooddebt recycling strategy
2. With the capitalised interest on the margin loan, say i borrowed another 300k,and capitalised interest over a period 50k for eg, can it be added to the cost base so that if my original portfolio value was 500k; the capital gains would b 850k -550k instead of 850k-500k
I am assuming u cant deduct capitalised interest in a margin loan if u havent paid it?
Thanks in advance

 

[Terry_w]

Ni Hao Renminbi

Interestingly capitalised interest is deductible if the original loan interest is deductible. But with property the ATO has put out a TR saying they may deny this deduction if it was done as a scheme to pay off the home loan sooner.

As far as I know there is no TR or other ATO advice saying capitalised interest on a share margin loan would not be deductible. But very similar principals apply so you could expect the ATO may want to apply Part IVA and deny the deduction.

Also what you are proposing would be pretty dangerous. Double borrowings.

You could deduct interest you haven't paid if you 'incur' it.

 

[neK]

I'd never turn my PPOR into an IP, if I ever move, I'll sell. Yields here are terrible.

Never say never
Anything is possible. Question is how much do you want to paint yourself into a corner.

 

[spludgey]

Never say never
Anything is possible. Question is how much do you want to paint yourself into a corner.

I'd rather take that risk than lock up $600k of equity (my current mortgage) that I won't be able to use to purchase other properties with.

 

[neK]

I'd rather take that risk than lock up $600k of equity (my current mortgage) that I won't be able to use to purchase other properties with.

If you have $600k of equity, why not do an equity release?
Why pay down the loan to take it out.

Unless of course you are referring to the fact you have a $600k loan with $600k in the offset and there is no available equity to release.

 

[dajackal]

Unless of course you are referring to the fact you have a $600k loan with $600k in the offset and there is no available equity to release.

In this scenario, ATO won't come knocking on your door if you pay down loan and reborrow?

 

[spludgey]

If you have $600k of equity, why not do an equity release?
Why pay down the loan to take it out.

Unless of course you are referring to the fact you have a $600k loan with $600k in the offset and there is no available equity to release.

What I mean is that I currently have a mortgage of $600k. So in order to be able to transform this into a deductible loan once I turn my PPOR into an IP, I'm not allowed to pay it off, so I'd have to set up an offset account and slowly put $600k into it.
For simplicity's sake let's assume my house is worth $1M (it's not).
This means that I can take out an extra $200k LOC which I can use to invest with (20% LVR).

However, if I had the $600k offset sitting against the $600k, I could instead pay it back and get a $800k LOC instead.
Assuming 20% deposit and 5% costs, this means that I can only buy $800k of property if I have the money in an offset as opposed to $3.6M if I pay the principle back.

I know that this is probably a little oversimplified, but hopefully it illustrates the point that I'm trying to make.