Opinions on our PPoR into IP scenario...

[Samwise]

PPoR current value $700K.
Original mortgage was $425K but we borrowed an extra $50K to tart the place up.
All of our savings are sat in an offset account so we're only currently paying interest on $330K

We're in the market for our first IP, for which i've seen a broker and would like to release some equity to use as the 20% deposit and costs. Remaining 80% will be a new loan.

In the meantime we thought about trading up our PPoR but just cant afford the large mortgage (yet) for the house we really want so we're thinking about renting one for a couple of years and turning our PPoR into an IP also.

- What do people think of this? I expect our place would rent for $500pw and we'd have to pay $700pw to rent a bigger place (and appreciate that this is lost money that we justify to ourselves through enhancing our lifetsyle). Have read and understand the CGT 6-year rule.

- How should I structure the financing of the investment property we wish to buy, if we then intend to turn our PPoR into an IP also?

- Confused as to what would be the tax deductable amount from our PPoR? If i release as much equity as possible from our PPoR (up to 80%, so $560K loan value), then rent it out?

Lastly... assuming we havent touched the majority of the cash that was in the PPoR offset account, where is the best place to put it? We will have no non-deductable loan.

Cheers in advance

Sam

 

[Samwise]

Anyone?

(wrong forum?)

 

[Perp]

OK, the maximum deductible loan for "PPOR turned IP" (let's call it IP1) will be the $475K used for purchase and improvements on the property (presuming you haven't contaminated these amounts).

If you increase borrowings against IP1 to $560K, and use the $85K extra as a deposit on your new IP, then the interest on the $85K will also be deductible, but only against this property (IP2), so I'd keep it as a separate loan account (ie 2 loans against IP1, but with two purposes, 1 for IP1 and 1 for IP2). And then you'll have a third loan for the 80% balance of IP2. The interest on all three of these will be deductible, as you said.

The $145K that I calculate you have in an offset ($475K maximum limit, paying interest on $330K), should remain in an offset for your use as a deposit on your new PPOR, when you buy it. When you do buy your new PPOR, use the minimum amount possible as deposit, and put the rest in the offset against your PPOR. You save more by reducing PPOR interest (after-tax dollars) than you do by reducing your IP interest (pre-tax dollars).

Good luck!

 

[Samwise]

Thanks for the reply

I guess the next question is how do I know if I have contaminated my PPoR loan? We borrowed the $50K extra (i.e. increased the upper limit of the mortgage) and spent it on home improvements (kitchen, bathroom, flooring, garden, garage door etc.) and kept receipts for most of it.

What is a contaminated loan?

And what do people think about this in general as a strategy for living in a house you cant afford to own?

Cheers, Sam

 

[The Y-man]

Thanks for the reply

I guess the next question is how do I know if I have contaminated my PPoR loan? We borrowed the $50K extra (i.e. increased the upper limit of the mortgage) and spent it on home improvements (kitchen, bathroom, flooring, garden, garage door etc.) and kept receipts for most of it.

What is a contaminated loan?

Yep, that's contaminated.

If the money is not used for generating income, it's "personal use" - i.e. you can't ever claim the interest expense on that portion from your income tax.


Cheers,

The Y-man

 

[The Y-man]

- Confused as to what would be the tax deductable amount from our PPoR? If i release as much equity as possible from our PPoR (up to 80%, so $560K loan value), then rent it out?

It comes down to what you use the released equity for - not what is happening with the property.

If the equity is used for income producing purposes the interest will be deductible.

Cheers,

The Y-man

 

[Samwise]

... but i've added to the amount i can depreciate at least, yeah?