PPOR to IP loan structure - deductibility of principal paid off already

[dumadiscount]

I'm moving interstate for work in a hurry and we're moving out of our PPOR and will rent out it out:

- Home Loan (P&I) is approximately $525K, current balance $375K

- Current Valuation of property is approximately $750K

- Both me and my wife are PAYG wage earners

A friend has recommend that I look to convert home loan to interest only investment loan for up to 90% of value of property. (Surplus funds to be held for flexibility ie. further investment purposes later or fund new PPOR). He said all interest is tax deductible.

Is this the best course of action if I am converting the PPOR to an IP? My concern is that I have paid off $150k off the principal and my understanding is that portion of the principal is no longer deductible.

Thanks for your help!

 

[Propertunity]

A friend has recommend that I look to convert home loan to interest only

Good advice IMO.

investment loan for up to 90% of value of property. (Surplus funds to be held for flexibility ie. further investment purposes later or fund new PPOR). He said all interest is tax deductible.

The interest on the "top up" is only tax deductible if used for investment purposes.

.....I have paid off $150k off the principal and my understanding is that portion of the principal is no longer deductible.

That's correct - the portion of your loan that is paid off, is no longer tax deductible. Everyone who turns their PPOR into an IP (if they are paying P&I as opposed to IO is in the same boat as you).

 

[Redom]

I'm moving interstate for work in a hurry and we're moving out of our PPOR and will rent out it out:

- Home Loan (P&I) is approximately $525K, current balance $375K

- Current Valuation of property is approximately $750K

- Both me and my wife are PAYG wage earners

A friend has recommend that I look to convert home loan to interest only investment loan for up to 90% of value of property. (Surplus funds to be held for flexibility ie. further investment purposes later or fund new PPOR). He said all interest is tax deductible.

Is this the best course of action if I am converting the PPOR to an IP? My concern is that I have paid off $150k off the principal and my understanding is that portion of the principal is no longer deductible.

Thanks for your help!

Hey,

If you top up back to 90%, make sure you do it in a separate loan account to ensure you don't mix deductible and non deductible debt.

You can utilise a well mapped out debt recycling strategy to slowly churn it back to deductible debt in time. Best to speak to your accountant on how, but can be quite lucrative.

Cheers,
Redom

 

[Jamie M]

Hiya dumadiscount

I started a thread on this today - it explains a situation similar to yours. It might be helpful - http://somersoft.com/forums/showthread.php?t=105176

Cheers

Jamie

 

[Terry_w]

If your friend is obviously not qualified to give tax advice as the interest on the increased loan will not be deductible.

 

[Nem]

Hey,

You can utilise a well mapped out debt recycling strategy to slowly churn it back to deductible debt in time. Best to speak to your accountant on how, but can be quite lucrative.

Cheers,
Redom

Interesting point Redom, how is that doable?? I am in the similar situation

 

[Redom]

Not qualified to give specific tax advice, but generally you need good cash flow properties that can be used to pay down non deductible debt. In this case:

1. OPs has paid down PPOR debt by 150k. Therefore this investment only has $375k of deductible debt.

2. Re-leverage up and use funds for INVESTMENT purposes. All this debt will be deductible. In this case, OP can re-borrow up to 80% LVR, and use those funds to purchase a few more IPs that generate strong cash flow (strong yields, low LVRs, NRAS's, etc, whatever's required to generate big cashflow $$$).

3. Assuming OP wants to buy another PPOR, pay it down fast with the cash flow generated from the IPs purchased. Continue paying down PPOR and when there's equity, re-borrow to fund more IPs, which accelerate the cash flow process.

4. Over time, the 'non deductible PPOR' debt will be paid down with the cash flow from the IPs, and replaced with only investment deductible debt.

Of course this can take years to do, slow but steady process that optimises tax situation. Best to not take my advice on this one though - a tax/financial planner are qualified to do so.

Cheers,
Redom

 

[Redom]

I'm not sure i'm allowed to do this mods, so feel free to get rid of the link (i'm not related to the company below, they've just got nice diagrams via google!!!).

http://www.investblue.com.au/knowledge-centre/fact-sheets/fact sheet-debt recycling1208.pdf

 

[albanga]

Good post Redom and the URL you provided explains it nice and easily (with pretty pictures as well).

 

[Nem]

Thank you Redom, very good point and link!

 

[jingo]

I'm not sure i'm allowed to do this mods, so feel free to get rid of the link (i'm not related to the company below, they've just got nice diagrams via google!!!).

http://www.investblue.com.au/knowledge-centre/fact-sheets/fact sheet-debt recycling1208.pdf

Good read, Redom, thanks,

Very clearly explained and an effective wealth building strategy.

 

[Qlds007]

An alternative is for one of you to look at buying out the interest of the other and borrowing to do so.

Whilst there maybe some additional stamp duty payable the interest on the funds borrowed will be Tax deductible once the property is available for rent.

We do a lot of loan restructure work thru a major Accounting firm in Brisbane and such applications are a weekly occcurance.

Cheers

 

[albanga]

An alternative is for one of you to look at buying out the interest of the other and borrowing to do so.
Cheers

I have not heard of this before. Could you perhaps eleborate? How would the numbers look?

 

[Qlds007]

Would vary from State so check with the OSR in your State.

(As an example in Vic there is no Stamp Duty when you transfer Title between husband and wife when the property is being used as an investment property).

Take Qld for example and dumadiscount's situation.

Current approx value 750K or 375K each.
Current loan 375K or $187,500 each.

Mr D could buy Mrs D's interest in the property out by borrowing an additional amount of $375,000 less $187,500 = $187,500. These funds could be used for deposit on their new PPOR down South.

Total debt would now be $375,000 + $187,500 = $562,500 and the interest on the full amount would be Tax deducible once the property was available for rent.

Stamp duty on the additional transfer amount would be payable (In Qld still payable at the concessionary rate for owner occupiers) but depending on Mr D's Tax bracket and longer term objective for the current home could be recouped very quickly.

Cheers

 

[Terry_w]

I have not heard of this before. Could you perhaps eleborate? How would the numbers look?

I am sure you have heard of a spousal sale before. Heaps of threads on it.

I just did one which resulted in an extra $7000 pa extra tax deductions for a client. no stamp duty and no CGT.

 

[albanga]

I am sure you have heard of a spousal sale before. Heaps of threads on it.

I just did one which resulted in an extra $7000 pa extra tax deductions for a client. no stamp duty and no CGT.

I had a few beers with a friend last night and after only about 6 hours sleep and no coffee I was reading this and did not register what was being said "Spousal Sale".

All good now, makes much more sense!