PPOR + Offset & equity confusion....

[whatdoyouwant00]

Hello all,

I thought I understood the way i set up my loan etc but am confused now as i'm about to convert my PPOR into an IP whilst accessing equity....

So, history....

2007 - i bought a house for 480k, 20% down so 384k IO mortgage with 100% Offset account. I have been and am still living in this house (PPOR)


2010 - refinanced to get a lower rate (old loan was Lo-Doc). Bank valuation came in at 550k and i refinaced to 400k so currently at 73% LVR

2011 - now, i have decided that I want to move (i will rent) closer to work and will rent the house out. I would also like to access some of the equity (maybe up to 90% or whatever i can - even just 80%)

Questions:

If I pull the equity out now so for arguments sake my loan is @ 90% can I then claim the whole interest amount on the 495k loan as a tax deduction once the house is rented??


Thanks

 

[Rolf Latham]

Questions:

If I pull the equity out now so for arguments sake my loan is @ 90% can I then claim the whole interest amount on the 495k loan as a tax deduction once the house is rented??


Thanks

Hiya

No............only the initial 384 is deductible ( unless the little bit of refinance was used for an investment purpose.

Id look at 2 or 3 loan splits to cover all the purposes

ta
rolf

 

[whatdoyouwant00]

Thanks Rolf!

So....the original loan amount will ALWAYS be what can be claimed for that property??

 

[Rolf Latham]

yup

unless

1. You use a LOC and capitalise investment interest and other costs
2. You have spent, or will spend money on the property for improvements etc
3. You do a partial or total sale to a spouse or related entity such as a unit trust.

ta
rolf

 

[whatdoyouwant00]

Ok, it's making sense now. So should I pay down 16k of the loan to get it back to 384k to make it neater & easier taxation wise??

 

[Thrawn]

I presume when you refinanced to $400k the new bank gave a cheque for $384k to the old bank and $16k to you personally.

From that point on, you have to apportion the interest deductability between what was paid to the old bank and paid to you personally.

Any principal repayments on the $400k loan would be apportioned equally as well. If you pay down half the loan, you're in fact paying off half of both portions. So paying down $16k wouldn't do what you want and in fact would just complicate your taxes even further.

 

[whatdoyouwant00]

Thanks Thrawn, i think i understand......so is there anyway to tidy it up now?

 

[srini]

I'm fairly new to this, but I'll take a stab at this. Please correct me if I'm mistaken.

Interest you pay on the $384K is fully tax deductible because its used for investment purpose.

Interest on the balance is deductible only if you use it for investment purposes.

I would get the bank to split the loan into two loans.

Loan 1: $384K IP loan fully deductible
LoC: Setup the balance as a line of credit.

Use the LoC for non-investment purposes if that is what you are planning to do.

If you use portion of the LoC for investment, split that again into a separate loan or LoC.

At tax time, you have not polluted your investment expenses with personal expenses.