PPOR to IP - deductibility

[coolcup69]

Hi everyone

I just want to cement my understanding of what is probably a very basic concept to all of you. It involves the scenario of turning a PPOR into an IP.

Scenario 1
Person A buys a house, his PPOR. He buys it for $100 and has an $80 loan against it. Over time he pays down the loan to $50 and holds $30 in redraw. He then decides to move to another home, his new PPOR. Person A uses the funds in his redraw to help him buy the new PPOR. He then rents his old PPOR as an Inv Prop.

Scenario 2
Person B buys a house, his PPOR. He buys it for $100 and has an $80 loan against it. Over time he builds $30 of savings in an offset account. He then decides to move to another home, his new PPOR. Person B uses the funds in his offset account to help him buy the new PPOR. He then rents out his old PPOR as an Inv Prop.

Interest deductibility
My understanding is that in Scenario 1, only $50 of the loan is now deductible debt, whereas in Scenario 2, the full $80 is deductible debt. This is because in Scenario 1, the $30 of savings in redraw were used for a non-investment purpose (ie buying the new PPOR) whereas in Scenario 2, the $30 came from an offset account, meaning the whole $80 of debt against the original PPOR is now being used to fund it as an IP and so is deductible.

Is this understanding correct?

Sorry for such a basic question, but I think it is key to understanding a number of questions / answers on this forum and I want to make sure I get it!!

Thanks in advance

 

[HD_ACE]

correct

the purpose of the funds determins deductability

cheers

 

[Terry_w]

Yes,

In scenario 1 only $50 of the borrowings relates to the purchase of the property. When this property becomes a rental this loan interest will then be deductible.

$30 redrawn is new borrowings and the interest will only be deductible if used for investment purposes

 

[Aaron_C]

You got it. Good work!

 

[jonmardell]

you are 100% correct, it is the purpose of the funds that determine if it is tax deductible. My advice to customers is never use redraw and use the offset account that is setup.

Hi everyone

I just want to cement my understanding of what is probably a very basic concept to all of you. It involves the scenario of turning a PPOR into an IP.

Scenario 1
Person A buys a house, his PPOR. He buys it for $100 and has an $80 loan against it. Over time he pays down the loan to $50 and holds $30 in redraw. He then decides to move to another home, his new PPOR. Person A uses the funds in his redraw to help him buy the new PPOR. He then rents his old PPOR as an Inv Prop.

Scenario 2
Person B buys a house, his PPOR. He buys it for $100 and has an $80 loan against it. Over time he builds $30 of savings in an offset account. He then decides to move to another home, his new PPOR. Person B uses the funds in his offset account to help him buy the new PPOR. He then rents out his old PPOR as an Inv Prop.

Interest deductibility
My understanding is that in Scenario 1, only $50 of the loan is now deductible debt, whereas in Scenario 2, the full $80 is deductible debt. This is because in Scenario 1, the $30 of savings in redraw were used for a non-investment purpose (ie buying the new PPOR) whereas in Scenario 2, the $30 came from an offset account, meaning the whole $80 of debt against the original PPOR is now being used to fund it as an IP and so is deductible.

Is this understanding correct?

Sorry for such a basic question, but I think it is key to understanding a number of questions / answers on this forum and I want to make sure I get it!!

Thanks in advance

 

[coolcup69]

Thanks very much everyone.

Now for a further twist to aid my understanding. What can Person A (Scenario 1) do to get himself in the same position as Person B (Scenario 2)? Is it as simple as refinancing into an offset structure and having the funds from redraw placed in the offset? Or is Person A stuck with a maximum of $50 of deductible debt if he chooses to change the PPOR to an IP?

 

[The Y-man]

Thanks very much everyone.

Now for a further twist to aid my understanding. What can Person A (Scenario 1) do to get himself in the same position as Person B (Scenario 2)? Is it as simple as refinancing into an offset structure and having the funds from redraw placed in the offset? Or is Person A stuck with a maximum of $50 of deductible debt if he chooses to change the PPOR to an IP?

Not so simple. Can:

• Sell (old) PPOR and buy IP
• Take redraw of (old) ppor and buy another IP (so now 3 properties)

The Y-man

 

[coolcup69]

Not so simple. Can:

• Sell (old) PPOR and buy IP
• Take redraw of (old) ppor and buy another IP (so now 3 properties)

The Y-man

Thanks Y-man.

Just so I understand you correctly, in the second scenario, where he redraws from the old ppor to buy another IP, he would need to create a loan split for the amount redrawn in order to segregate that loan as deductible right? Also, why does he end up with 3 properties?

It does not appear from your examples that there is any real way for him to claw back the $30 in redraw to be deductible in the situation where he simply converts his PPOR to an IP and moves to a new PPOR. Am I reading this correctly?

 

[Terry_w]

You can only claim interest on money borrowed for invedtment or business purposes.

Things could possibly be done

. Borrow to pay for investment expenses.
2. Borrow to pay interest.

WIth 2 good advice will be needed as ato may try to deny tje deduction if there is no commercial reason behind this.

OTher options involve selling the property. To a trust or to a spouse. But this has further complications.

 

[The Y-man]

Just so I understand you correctly, in the second scenario, where he redraws from the old ppor to buy another IP, he would need to create a loan split for the amount redrawn in order to segregate that loan as deductible right? Also, why does he end up with 3 properties?

Sorry - this one breaks the parameters of your original question.

What I meant was:
Redraw money from old PPOR and buy an IP (rent it out)
Rent out old PPOR
Buy new PPOR without using any of the money from old PPOR

The Y-man

 

[The Y-man]

It does not appear from your examples that there is any real way for him to claw back the $30 in redraw to be deductible in the situation where he simply converts his PPOR to an IP and moves to a new PPOR. Am I reading this correctly?

Pretty much correct.... that's why we tell people don't pay off your PPOR even if you think you are never going to rent it out. Have the cash in an offset by all means so you pay less interest, but not pay off the loan principal.

The Y-man