PPOR to IP Questions re: Deductability

[Buddybee]

I know there are 1000's of threads on PPOR to IP, but I couldn't find one that fitted our circumstances.

We purchased our current PPOR 5 years ago and had a loan for $280K, value at the time was $500K. Loan was P&I with Redraw, no offset account.

We paid off the loan about 12 months ago and decided to refinance to purchase an IP. The product we initially had was a bit of a fizzer and wasn't going to meet our needs long term, so we refinanced with another institution for 60% IO of current valuation ($750K). On settlement we withdrew all funds and parked them in an offset account.

Move forward to today, and we still haven't bought an IP (for various reasons) but are now considering upgrading our PPOR and turning our current PPOR into an IP, so my question is - what interest component is deductable? The current loan amount, the original loan amount or nothing?

For asset protection purposes, we do have a trust arrangement setup for investing, and may just sell the current PPOR into the trust when we convert it to an IP. If we did this I understand the loan the trust gets would be 100% deductable and that stamp duty would be payable.

I have a meeting with the accountant on Tuesday to discuss this further and seek specific advice, but I'm interested in exploring the options and understanding what's ahead of me before we meet. Idea's and comments appreciated

Cheers
Buddybee

 

[Propertunity]

We paid off the loan about 12 months ago

This is the killer statement for you. It means no interest on this property is ever tax deductible unless the loan monies are used to renovate or somehow do some work on this property only.
Or it is "sold" to another one of your entities and that entity borrows to buy it. (yes this would attract SD payment to the OSR)

 

[Rolf Latham]

Hindsight ......................if only youd known or been advised by someone that was setting the loan up with a simple question that I ask.............will u die in the place ..............get some odd looks but peole get the idea then

ta
rolf

 

[Buddybee]

Thanks for the replies - I had expected the worst.

Should we turn this PPOR into an IP, I had real concerns about leaving it in our personal names anyway. I don't "expect" to be sued, but when you do all your business with folks from the US of A you can never be too sure.

If there is one positive, in terms of planning and decision making it's certainly nice to be able to cut to the chase and discount the options quickly.

Cheers
Buddybee

 

[Mry]

We paid off the loan about 12 months ago

Old loan paid off.

and decided to refinance to purchase an IP.

New loan obtained, however....

we still haven't bought an IP (for various reasons)

so it isn't currently a deductible loan, but that doesn't really matter at this stage since......

On settlement we withdrew all funds and parked them in an offset account.

.....there's no interest being incurred

Move forward to today, and but are now considering upgrading our PPOR and turning our current PPOR into an IP, so my question is - what interest component is deductable? The current loan amount, the original loan amount or nothing?

The current loan has no purpose. It merely financed the offset account. Therefore as mentioned before, no deduction. Could the offset funds be used to renovate your current property to make it more valuable, attract tenants and increase the rental yield? Only if you didn't touch the funds in the offset account. If you did, see your accountant.

For asset protection purposes, we do have a trust arrangement setup for investing, and may just sell the current PPOR into the trust when we convert it to an IP. If we did this I understand the loan the trust gets would be 100% deductable and that stamp duty would be payable.

Yes, but if you purchase it in a discretionary trust, the losses would not be able to be claimed against your personal income.

The difficulty with the advice you are seeking is that it has to take into account what your investment goals are, how you earn your regular income and you may have to choose between income splitting, asset protection and negative gearing. Work out your priorities in that area, and then go see your accountant. While it is understandable that you want to be more aware of what sort of questions you want to ask, you need someone who knows your situation and your goals in order to give you the right advice.