Own property outright - refinance to -ve gear?

Hi All,

I own a place outright, purchased in 2005. My intention is to refinance the home and to rent it out as an investment property and potentially get tax benefits as I will now have interest repayments to offset my income.

I was told, or given some warnings that this is not legal, as the reason for me to refinance is to avoid tax.

Any advice? or feedback on this matter is much appreciated.
 
It's all about the use of the funds that you obtain by refinancing.

If you used these funds to invest in income earning investments then the refinance would be tax deductible.

But if you used the resultant funds to use personally, such as purchasing a new car or another PPOR then the interest is not tax deductible.

Cheers
 
Handyandy's correct.

You cannot refinance a non existent loan. What you are talking about is borrowing money. It is the purpose of the borrowings and the use of the funds that determines deductibility and not the security.
 
I agree with the previously provided advice regarding the deductability of the loan.

I'm also a little concerned about your motivations. Negative gearing is essentially a tax break you get when you invest and make a loss. The ATO applies this loss against your income and gives you a tax refund so in effect you're not taxed on the loss of income.

If you're on a 30% tax bracket, it that for every dollar the property costs you to hold, the government will give you 30 cents back. You're still making a loss of 70 cents in the dollar.

Alternatively to your plan, you could give me a dollar, and I'll happily give you back 30 cents.

You pay tax when you make a profit. You get a tax refund when you make a loss. The conventional wisdom is it's usually better to have to pay some tax. You shouldn't aim to negative gear just because you get some tax back; you don't get back anywhere near what it cost you.
 
Hi all,
thanks so much for your comments and feedback.
So if based on your resoning so far, I can do the following.

Borrow funds (not refinance) from the bank and use the property I own outright as collateral, basically accessing its equity. I can rent this property out and claim its offsets. The intention is to transfer the equity from this property into my new PPOR mortgage. Does this make sense? I am doing all this to try and hold both properties at a reasonable cash flow.

To me this sounds like a valid way of doing things. The purpose is to use my outright owned property to now become and IP.


PT bear: I am only doing because I have purchase another property which will serve as my PPOR. THe intention is to try and keep both, so I wanted to reduce my holding cost of the property as much as possible, hence why negative geared. I would rather it be positive of course :)
 
Hi all,
thanks so much for your comments and feedback.
So if based on your resoning so far, I can do the following.

Borrow funds (not refinance) from the bank and use the property I own outright as collateral, basically accessing its equity. I can rent this property out and claim its offsets. The intention is to transfer the equity from this property into my new PPOR mortgage. Does this make sense? I am doing all this to try and hold both properties at a reasonable cash flow.

To me this sounds like a valid way of doing things. The purpose is to use my outright owned property to now become and IP.


PT bear: I am only doing because I have purchase another property which will serve as my PPOR. THe intention is to try and keep both, so I wanted to reduce my holding cost of the property as much as possible, hence why negative geared. I would rather it be positive of course :)

No, you cannot do that.
 
I should expand. see my post above.

The interest on the loan won't be deductible if you use the borrowed money for your new main residence.
 
Hi Terryw,
appreciate your comments. I see where you are coming from.

I think the mistake was made early on. I should have took a loan to buy that property instead of paying it outright. That way I can trasfer the equity.

Now I am left with either selling the property or accessing the equity to buy other investments e.g. shares. Both are viable but would rather just do the simple thing of renting out and gaining offsets.
 
Can you afford to hold both?

Why not rent out the property and use the rent plus your income to pay off your PPOR sooner?

I'd much rather be making money and having to pay tax than trying to make a loss to get a tax refund.
 
Suggest speaking to your accountant...

I would suggest looking at you options of keeping current property with rental income (being tax) and your current mortgage repayments.

Compared to selling your house (possibly CGT free) and reducing your mortgage balance.

As stated in originally you need to speak with a professional who can give you personal advise.
 
Id consider buying 2 extra properties! that will improve your tax and cashflow situation, with a marginal increase in risk (in the sense you are now borrowing more)

alternatively, sell the current property and use the cash to buy the next one. No debt, no decution, no rent, no CGT. simple.

Lots of people want to hold onto thier PPOR and use it for investment. It doesnt always make the best rental, and its hard to let go of it emotionally when tenats are in it.
 
Hi All,

I own a place outright, purchased in 2005. My intention is to refinance the home and to rent it out as an investment property and potentially get tax benefits as I will now have interest repayments to offset my income.

I was told, or given some warnings that this is not legal, as the reason for me to refinance is to avoid tax.

Any advice? or feedback on this matter is much appreciated.

Hiya Fuister

A spousal sale or a sale to a unit trust MAY be worth considering.

ta
rolf
 
Once again thanks for the comments, it has been extremely helpful. This forum has been my first point of call for any property related queries, and this just reinforces it further.

I will check this spousal sale suggestion.
 
If your property is in VIC then spousal sale will work well. Nominal stamp duty and no CGT.

You need to speak to your lawyer and accountant - and mortgage broker as the loan needs to be done of course.
 
I would like more info on the spousal sale as I am in a similar position. Is accountant the only place to do so? (I don't have one so would like to avoid the hassle of finding a good one if possible). Would state revenue office for example have more info on the stamp duty side of things?

I also wish to reask the original question with slightly different emphasis, just to be sure (thanks in advance for your patience). I have a house I used to live in. It was repaid in full before I moved out. I had a formal valuation (cost approx $300) done at the time of moving out. That house has been rented out for more than a year. I am now considering purchasing a new house to live in.
I can borrow against house 1 to fund the new purchase. For tax purposes would it be valid to state my purpose as borrowing to enable keeping the first property? (and hence claim the interest as a tax deduction). To me it seems silly not to be able to do this as the end result is no different to selling the existing place and buying two new ones, one to rent out, one to live in. The obvious disadvantage of this scenario is that it incurs agents selling fees and stamp duty on the purchases. Hence the possible appeal of the spousal sale but then it would be a question of maximising the benefit if she's not working.
 
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