Own property outright - refinance to -ve gear?

[Terry_w]

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).

No. This is not possible and your argument is not logical either.

If you own property 1 outright then how would borrowing against it enable you to keep it?

You will be borrowing against one property to buy a new property. If the new property will be owner occupied then it will be a private expense and interest won't be deductible.

 

[Terry_w]

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?

You will need to speak to a solicitor and an accountant. You need to do the conveyance - the purchase from one spouse by the other. For interest to be deductible you need to set it up correctly.

You could ask the OSR for information and look up the Duties Act yourself. This would give you some broad ideas, but be careful if you try to do the transaction yourself. I think I have given the section of the duties act re the exemption somewhere above.

 

[Moving]

I think it is logical.

My options are:
1. Sell existing (E) and buy new (N). Simple, no rent income on E and lower or no debt on N.
2. Keep E & buy N. Needs loan. Loan whilst used to buy N is in effect to keep E. Without the loan I don't have the rent income as I don't have the extra property.

 

[Moving]

Thanks Terry, certainly not looking to do the conveyancing myself so will speak to lawyer fo r that. Did some other quick internet research and suspect you post on other sites too as the duties act reference appeared elsewhere under a 'Terry W' post.

Found the following references:
http://www.austlii.edu.au/au/legis/vic/consol_act/da200093/s43.html

http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID200179/00001
ATO ID 2001/79

and now need to look at them.

 

[Terry_w]

I think it is logical.

My options are:
1. Sell existing (E) and buy new (N). Simple, no rent income on E and lower or no debt on N.
2. Keep E & buy N. Needs loan. Loan whilst used to buy N is in effect to keep E. Without the loan I don't have the rent income as I don't have the extra property.

You need the loan for the new property, not to keep the old one.

 

[Burnar]

I think it is logical.

My options are:
1. Sell existing (E) and buy new (N). Simple, no rent income on E and lower or no debt on N.
2. Keep E & buy N. Needs loan. Loan whilst used to buy N is in effect to keep E. Without the loan I don't have the rent income as I don't have the extra property.

This is making me laugh and now my boss is giving me a weird look.

I think Terry knows better than you.

 

[Moving]

Glad I can provide some laughs! Can't say it any simpler than: if I don't keep the existing property then I don't need the loan.

Opposing view just means I need to seek formal advice. Am happy to have posted here as have gained the spousal sale option but at end of day may just keep things simple.

 

[Moving]

At the risk of more laughs, think of it this way:

What is my incentive to sell existing and buy 2 new properties, 1 for principal residence and one with a loan against it for investment purposes? More stamp duty, selling costs and legal fees! Yet at the end of the day I would be in exactly the same situation, 2 houses, 1 to live in, one to rent out. If all the tax office does is look at where the loaned money went then that explains why there is a lack of housing in Australia and hence why it's relatively expensive to own a home (might also have something to do with maintaining our relatively high living standards)

 

[Terry_w]

At the risk of more laughs, think of it this way:

What is my incentive to sell existing and buy 2 new properties, 1 for principal residence and one with a loan against it for investment purposes? More stamp duty, selling costs and legal fees! Yet at the end of the day I would be in exactly the same situation, 2 houses, 1 to live in, one to rent out. If all the tax office does is look at where the loaned money went then that explains why there is a lack of housing in Australia and hence why it's relatively expensive to own a home (might also have something to do with maintaining our relatively high living standards)

That is like saying I need to borrow money to buy my new home and the interest should be deductible because I own a car. If I didn't own the car I could have used those funds to reduce my loan.
Doesn't make sense.

ATO doesn't make the laws, but implements them (and some times makes up their own interpretations of the laws).

 

[Moving]

It is like it but not the same as I'm guessing you aren't generating rental income from your car?

 

[tobe]

At the risk of more laughs, think of it this way:

What is my incentive to sell existing and buy 2 new properties, 1 for principal residence and one with a loan against it for investment purposes? More stamp duty, selling costs and legal fees! Yet at the end of the day I would be in exactly the same situation, 2 houses, 1 to live in, one to rent out. If all the tax office does is look at where the loaned money went then that explains why there is a lack of housing in Australia and hence why it's relatively expensive to own a home (might also have something to do with maintaining our relatively high living standards)

You dont need to sell and buy two new properties. You have lots of choices. However not all of those choices involve negative gearing. if you want to negative gear, then the costs of the income producing asset need to be more than the income from that asset. When aportioning 'costs', you can only use thos costs reasonably incurred for the purchase or upkeep of the income producing asset.

 

[Terry_w]

Yes, it is your choice. You can sell or borrow 100% of the new property. Overall your loan position may be the same.

If you could claim interest on reborrowings on investment properties to fund private expenses everyone would be just doing that to pay off their non deductible debt.

You are just luck your property in in Vic, as full stamp duty would be payable in all other states.

 

[Moving]

You dont need to sell and buy two new properties. You have lots of choices. However not all of those choices involve negative gearing. if you want to negative gear, then the costs of the income producing asset need to be more than the income from that asset. When aportioning 'costs', you can only use thos costs reasonably incurred for the purchase or upkeep of the income producing asset.

Could you elaborate on what some of my other choices are?

 

[Terry_w]

Possible choices

1. Borrow 100% to buy the new one.

2. Sell existing house to spouse, or one spouse buy the other spouse's share and borrow to do so.

3. Sell to a trustee of a trust

4. Sell on the open market and reposition yourself to buy another replacement property.

It is a shame to pay all the stamp duty, agents fees, legals etc. It will cost you are fortune. But if you don't do anything and go with option1 then you will be paying large amounts of interest which won't be deductible. At the same time you would be paying extra tax in the rental income of the existing main residence (soon to be IP).

You just have to sit down and work out the costs to do one of 2,3,4 and see if these costs are worth it considering the long term savings.

 

[tobe]

stay where you are and do nothing.
stay where you are and buy an investment property and negatively gear it.
stay where you are and buy an investment property and positively gear it
move and rent out the old place and pay the loan with after tax income, and tax on the rental income (positive geared)
move out and rent the old place and also buy a second investment property, making your overall tax position closer to neutral/negative geared.
move out and rent out the old property then borrow to do some renos, on the now investment property. Along with the depreciation (on the reno's), this might make your tax poisition a little easier. You might also pay the interest in advance, and borrow the yearly interest cover for that portion and investigate debt recycling.....

Dont take tax advice from me, Im not an accountant.