Own property with no mortgage, Live in another with a mortgage

Discussion in 'Accounting and Tax' started by neiliss, 12th Jun, 2007.

  1. neiliss

    neiliss Member

    Joined:
    12th Jun, 2007
    Messages:
    8
    Location:
    Brisbane
    I fully own a property with no mortgage which I now want to rent out. I also have another property which I have moved into and have a substantial mortgage on. I want to pay off or at least reduce the mortgage on the new property as there are no seeming tax benefits on this property or mortgage as it is my primary residence. I therefore want to have a mortgage on the first property to benefit from tax when it is rented out as an investment and use the mortgage money from this property in my primary residence to reduce the mortgage monthly payments.

    1. Is this legal?
    2. If it is how do I do it?
    3. What are the issues with doing this?

    I appreciate any assistance on this.

    Thanks
    Neil
     
  2. tobe

    tobe Mortgage Broker

    Joined:
    10th Mar, 2007
    Messages:
    2,938
    Location:
    Melbourne Victoria
    1, no
    2, just lie on your tax return and say it is for investment purposes
    3, The ATO ask for the purpose of the funds, and if the purpose is to gain an income, you can claim the costs, such as interest etc. If the purpose is to live in the property, then you cant claim the interest.

    You could sell the first property, pay back the loan, and then buy another property.
    Alternatively, you could perhaps sell your property to your family trust and therefore transfer the debt to what is now an income producing property. You will have to pay stamp duty, and a lot of costs for the set up of a trust etc. It is also a tad convouted, and may be seen by the ATO as tax avoidance. I recomend getting some advice from a solicitor and accountant.
     
  3. Mry

    Mry Member

    Joined:
    14th Dec, 2004
    Messages:
    1,367
    Location:
    Brisbane, QLD
    Tobe has it right.

    Selling an asset into another structure rarely has problems with the ATO unless you do something stupid like write "I am doing this for tax purposes!!" somewhere and they find it during an audit.
     
  4. neiliss

    neiliss Member

    Joined:
    12th Jun, 2007
    Messages:
    8
    Location:
    Brisbane
    Just what I suspected. It was just bad luck that the original house that I purchased did not end up being the one that I decided to live in and therefore the mortgage is on the second property and not the first.

    I guess I will just have to get a tenant in place anyway and just report it as income and get taxed like everyone else.

    Any other suggestions feel free to post them.

    Thanks for the replies.

    Regards
    Neil
     
  5. The Y-man

    The Y-man Member

    Joined:
    27th Sep, 2004
    Messages:
    11,564
    Media:
    29
    Location:
    Melbourne
    Remeber that if you sell it, it will be TAX FREE :)

    Cheers,

    The Y-man
     
  6. Les

    Les Member

    Joined:
    18th Mar, 2001
    Messages:
    3,683
    Media:
    12
    Location:
    Work Sydney - home is Brisbane, as are IP's
    G'day Neiliss,

    Thinking further, perhaps this unencumbered property holds the key to more IP's. If you were to take a mortgage on it, and use this as a deposit on another IP (or share investments, whatever), then the mortgage will become Tax deductible. Then, (if you buy another IP) two lots of rent can go into an Offset Account against your current home mortgage.

    There are ways to overcome this "not so good" result.

    And, in future, consider using Offset against any future PPOR's mortgages (just in case you decide to move and rent them too). Nothing like thinking ahead :D

    Regards,
     
  7. Mr. Fabulous

    Mr. Fabulous Thought Criminal

    Joined:
    28th Sep, 2002
    Messages:
    6,127
    Location:
    Melburn
    Draw down equity from the unencumbered property, use it to buy more I.P.s and other investments, use the income to debt recycle the mortgage on the property you're in now.

    Mark
     
  8. neiliss

    neiliss Member

    Joined:
    12th Jun, 2007
    Messages:
    8
    Location:
    Brisbane
    Hi Les. I am in the process of purchasing another IP at this moment. How exactly will your strategy work as it does sound interesting. I am planning on getting a 100% loan on the new IP but of course I dont have to do this if I can use money from the other unencumbered IP.

    Appreciate the help.

    Cheers
    Neil
     
  9. MichaelW

    MichaelW Little Guy, Big Dreams

    Joined:
    1st Dec, 2004
    Messages:
    4,195
    Media:
    49
    Location:
    Brisbane
    Neiliss,

    This problem pops up here every now and again so don't think that you're alone in getting that structure amiss and trying to rectify it.

    I can't add much to what's been said already except to say how you might have done it differently and achieved your desired outcome. Might help others reading this thread if in a similar situation.

    The trick is to maintain your flexibility. Your non-deductible PPOR debt needs to be non-existant and the deductible IP debt the big one. So, how do you move this debt around legally when the IP becomes the PPOR or vice versa? The trick is to use a mortgage offset account for your PPOR debt and never actually reduce the loan more than required by your minimum repayments on a 40 year repayment plan.

    i.e. have a PPOR with a $800K mortgage and $800K sitting in the mortgage offset account against it. Borrow against the equity (LOC) to buy your IP and mortgage it up to the 85% too. Then all the borrowings are deductible as they're against the IP. Even the LOC is deductible due to its purpose. To be able to borrow the deposit using an LOC you might need to pay down some of the PPOR mortgage and then borrow it out again. If you just use the cash in the offset account then as it isn't borrowed, it isn't deductible against the IP. But the bulk of the IP is as the mortgage is against the IP. Worst case you can go LMI and reduce that deposit even further and just spend the cash as deposit. The intent here is not to spell out the detailed best option, but the broad picture of using an offset account to maintain flexibility.

    Now, if you want to move into the IP in the future and lease out the current PPOR, you simply write to the bank and redirect the mortgage offset account to the old IP loan and away from the old PPOR loan. The interest on what was your PPOR and is now your IP instantly becomes deductible as the property becomes an IP and has a large loan generating interest against it that is no longer offset, and you haven't done anything dodgy like moving loans around. The old IP loan now has no interest as it is offset by your big wad of cash in the bank. You maintain flexibility by keeping it in a mortgage offset account and directing it where you see fit as your circumstances change. It also gives you a nice cash buffer should you need it for any reason at a moments notice without having to go to the bank for an LOC approval.

    Cheers,
    Michael.
     
  10. neiliss

    neiliss Member

    Joined:
    12th Jun, 2007
    Messages:
    8
    Location:
    Brisbane
    I think that the best thing is for me to bite the bullet and sell property A (the unencumbered tax unfriendly property). I will then put the funds into my current PPoR (mortgage offset) to reduce my monthly payments substantially which are even more tax unfriendly.

    I am currently negotiating on another IP in any case with a 100% mortgage which I will then use the surplus funds in (mortgage offset again) from the sale of Prop A to make it cash positive but tax friendly as well.

    The savings of doing it this way are substantially more than keeping the unencumbered property. Finally I will go out and look for a new IP to purchase to replace the first property.

    I hope I explained that right and it makes sense.

    Cheers and thanks everyone for the help.

    Neil
     
  11. Les

    Les Member

    Joined:
    18th Mar, 2001
    Messages:
    3,683
    Media:
    12
    Location:
    Work Sydney - home is Brisbane, as are IP's
    G'day Neiliss,

    This is quite a common scenario, based on "Mum and Dad" telling us we should pay out our home as quickly as possible. Unfortunately, the laws of our land really don't favour that approach - so where does that leave us? In short, it means we need to look at other ways that are more aligned to the "laws of the land". And (for me) that is where Offset Accounts come in...

    MichaelWhyte gave some very good info right here where he said they help to maintain flexibility.

    The subject can seem daunting to those new to it, but a Search on "Offset" can yield many good threads and posts (many of which are easy to read and understand). Others, maybe not so, but hey - the Offset Account is able to provide that flexibility that Michael mentioned - as such it is worth schooling yourself on it.

    Or, if you are one who learns better by being "face-to-face", perhaps visiting a Mortgage Broker would be a good move for you to consider.

    I am not one so well schooled that I can help too much more, but it seems to me there IS another option for you, and Offset Accounts could well be the solution for you. So, can I say, go have a look (using "Search") then come back to ask further where the results don't answer all of your questions. If I can't help, I know that others can.....

    Regards,