Moving out from PPOR into IP

[willfong]

Hi, a quick question from those who know the rules or have done it before.

We bought our PPOR four years ago with 214k loan on it. We have been pumping extra repayments into the loan itself (not an offset account, didn't have one) and had the balance owing down to 98k before we refinanced the loan to 200k and use the 102k withdrawal as downpayment to purchase an IP recently. We plan to move into our new IP in a year or two and turn our existing PPOR into IP instead.

When we move to the new property and rent this one out, technically the new IP will become consumption and no longer an income producing asset. Will we only be able to claim interest payment expenses on the 98k or are there certain conditions that would allow us to claim the interest on the whole 200k currently owed on the old property?

Thanks,
Will

 

[willfong]

http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001

From the above tax ruling.

"Example two

61. Bill is a computer programmer. He is offered a job in Darwin and decides to relocate his family there. He borrows $200,000 from the bank and purchases a house in Darwin. He makes the minimum monthly payment of $1650. After two years the balance on Bill's home loan is $186,000.

62. Bill receives a $50,000 windfall and decides to pay this money off his home loan. This reduces the balance to $136,000.

63. Bill is then offered a job in Perth. He decides to take the job and relocate his family. He decides to rent out the house in Darwin and borrow to purchase a new residential property in Perth. Bill redraws $50,000 from the Darwin loan and uses this as a deposit for the new home in Perth.

64. Bill can deduct the interest accrued on the outstanding loan principal of $136,000 that is related to the Darwin house from the date that property is available for rental. Those borrowed funds are used at that time for income producing purposes. As the new borrowing of $50,000 is used as a deposit on the residence in Perth, the interest on that borrowing will not be deductible as it is incurred for a non-income producing purpose."

It's quite a straightforward case if Bill rent the house out first then redraw $50k to buy a new PPOR. But if Bill redraw the $50k out to buy an IP first and then move into the new IP a couple of years later, will he be able to claim the interest on the whole $186k (or whatever the balance is then) as that is the balance of the loan on Darwin house from the date that property is available for rental. Anyone?

I know I really should see an accountant for this, and I will definitely do that to get the latest applicable rule just before we move out but that's still a couple of years away and I am just curious for now.

 

[Mry]

Only the 98k from your original loan will be deductible, so if it is at 200k, only 49% (98/200) of the interest incurred will be deductible.

You have to track how much in each loan was originally used to purchase each property. In your Bill example, Bill will not be able to claim 186 as only 136 was used to purchase the Darwin property. In other words, the loan is 136/186 for Darwin and 50/186 for Perth. You can't magically make the loan 186/186 for Darwin.

 

[willfong]

Thanks Mry, I suspected as much. I think my only option will be to split the loan when we move out, clearly differentiating between the 102k and the 98k. Then somehow come up with 102k (when we have saved it up or equity from the other).. repay the 102k completely and then do a clean refinance and only use the 102k withdrawal (or whatever new figure we decide to refinance) to buy additional investments. I'll definitely consult an accountant before we do that.

 

[willfong]

One more question (two more actually):

1. It seems like ATO look at loans on the basis of their usage/purpose, not the security they are loaned against. If the ATO considers the 102k as cost of purchasing the 2nd house (current IP) even if it's actually part of the loan on the first property. Wouldn't that mean I can claim the interest on the 102k on top of the new loan for the IP for negative gearing when I still live in the first house and rent the new one out as the 102k was actually used to purchase an income producing asset? Eg in Bill's case he use the $50k to buy a new house in Perth and rent it out and continue living in Darwin. Would he be able to claim the interest on the $50k as well while Perth is rented out?
2. Anyone can recommend a good accountant in Melbourne who knows the taxation rules regarding investment property well?

 

[jsquared]

I'm facing exactly the same situation same like Willfong. Hopefully someone from this forum would be able to advice us a good accountant in Melbourne.
To be fair, we should be able to top up our PPOR Loan (which later on going to be our Investment), but dunno still confuse.
Hi Willfong, can you please let me know, if you have find answer to this or if you've found a good accountant.

 

[thedude]

One more question (two more actually):

1. It seems like ATO look at loans on the basis of their usage/purpose, not the security they are loaned against. If the ATO considers the 102k as cost of purchasing the 2nd house (current IP) even if it's actually part of the loan on the first property. Wouldn't that mean I can claim the interest on the 102k on top of the new loan for the IP for negative gearing when I still live in the first house and rent the new one out as the 102k was actually used to purchase an income producing asset?

Hi Willfong,

Short answer is yes. You can claim the $102K as it has been used for the purposes of an income producing asset. It gets a little messy taxwise if you have the 102K (tax deduct) and the 98K (non-tax deduct) all in the same loan, so i'd seperate them to keep things clean. Its a buggar you didnt have an offset as you wouldnt have ran into this issue. It seems considering your future plans of more investments etc an offset account might be a good idea now. At least then you can park your cash, have it work against the current non deductable loan you have and then when the time comes, attach the offset to the new PPOR loan or pull the money out and use it for whatever purpose, eg pay new PPOR loan down, buy a business, invest in a share portfolio, holiday, car etc, without worrying about whether it is for tax or non tax dedecutable purposes, as it doesnt affect the loan.

edit: the other thing I forgot to mention is that once you move out of your PPOR and move into the IP the deductablity is reversed. Therefore, lets say you swapped houses now. The outstanding loan used to purchased your old PPOR (now IP) of $98K is now tax deductable, however the $102K outstanding used to purchase your IP (now new PPOR) is non tax deductable.

Eg in Bill's case he use the $50k to buy a new house in Perth and rent it out and continue living in Darwin. Would he be able to claim the interest on the $50k as well while Perth is rented out?

Yep, same as above.

2. Anyone can recommend a good accountant in Melbourne who knows the taxation rules regarding investment property well?

http://www.gatherumgoss.com/ <- top notch.