PPOR to IP with variable and fixed loan

Hi all,

Planning to purchase a unit with 400k loan for PPOR.
We are looking at structuring our loan below:
- 200k on variable(interest only with offset)
- 200k on fixed loan for 3 years. (principal + interest)

In the next 5 years time, we plan to convert our PPOR to IP.

Question;
1) For the fixed loan, upon maturity after 3 years, the loan will be converted into the variable loan.
Will this contaminate the loan for tax purposes?

2) After converting to IP, will the interest be tax deductible on the full loan amount (400k)?

3) Will it be better off to just have a 400k variable (interest only with offset) loan?

Thanks
 
1) no - its the same loan same purpose
2) no - you would of paid some of the debt down as P & I on the fixed
3) maybe - if you want fixed and variable do that, then just make them both interest only and put all the funds in the offset against the variable.

If converting PPOR > IP you should set the loan up as IO to preserve the Principal for later use.
 
1. No.
2. No as the balance would have been paid down due to the loan being PI
3. Not if rates go up.

Seek legal advice because I can think of 2 strategies which could enable a lot more to be claimed.
 
Question;
1) For the fixed loan, upon maturity after 3 years, the loan will be converted into the variable loan.
Will this contaminate the loan for tax purposes?

2) After converting to IP, will the interest be tax deductible on the full loan amount (400k)?

3) Will it be better off to just have a 400k variable (interest only with offset) loan?

Thanks


I dont see any of these as an issue, xcept part 2 which TW has pointed out

As has been alluded to, a family guarantee and/or a TD as supp security can allow up to 105 % lend ie 525 or so in your case correctly structured, thus allowing 125 k extra deductability.

this means you would have less non ded debt when doing your next PPOR.

Not a big fan of most family guarantee scenarios, but some lenders are a little better than others in this area.

ta
rolf
 
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Care to share?

ok, I thought you would never ask.

Vic is the only state which allows stamp duty exempt spousal transfers at full market value, even for investment properties. So a couple could seek advice on the implications of buying in one name. Live in the property, later move out. s118-145 main residence exemption from CGT for up to 6 years. As equity builds up. Spouse A sells to spouse B at full market value with B borrowing 100% to fund the purchase. Cash released is used to buy a new PPOR. This essentially allows more interest to be deductible. No CGT or stamp duty payable.

Combine this with a related party loan. Spouse A buys the property borrowing 90% from Bank XYZ. other 10% usually comes from cash. This ties up cash in an investment property and will cost Spouse A money in lost deductions down the track. So Spouse A borrows the remaining 10% from spouse B or a related party. In 6 months as the property increases in value Spouse A increases his/her laon with Bank XYZ and refinances th loan with Spouse B. Spouse B now has more cash left to pay for a new PPOR. Spouse A has increased deductions.

Spouse A owns property and borrows from Spouse B to pay for investment related expenses similar to the above. Spouse A later refinances this loan.

Combine all of these and there will be more money in a couple's pockets down the track with great savings in non deductible interest.

But, careful planning with legal and taxation advice neeed for each. e.g. Spouse A is the owner, spouse B has no legal right over the property, so sposue A could sell, mortgage or gift the property without B's knowledge.
 
ok, I thought you would never ask.

Vic is the only state which allows stamp duty exempt spousal transfers at full market value, even for investment properties. So a couple could seek advice on the implications of buying in one name. Live in the property, later move out. s118-145 main residence exemption from CGT for up to 6 years. As equity builds up. Spouse A sells to spouse B at full market value with B borrowing 100% to fund the purchase. Cash released is used to buy a new PPOR. This essentially allows more interest to be deductible. No CGT or stamp duty payable.

Combine this with a related party loan. Spouse A buys the property borrowing 90% from Bank XYZ. other 10% usually comes from cash. This ties up cash in an investment property and will cost Spouse A money in lost deductions down the track. So Spouse A borrows the remaining 10% from spouse B or a related party. In 6 months as the property increases in value Spouse A increases his/her laon with Bank XYZ and refinances th loan with Spouse B. Spouse B now has more cash left to pay for a new PPOR. Spouse A has increased deductions.

Spouse A owns property and borrows from Spouse B to pay for investment related expenses similar to the above. Spouse A later refinances this loan.

Combine all of these and there will be more money in a couple's pockets down the track with great savings in non deductible interest.

But, careful planning with legal and taxation advice neeed for each. e.g. Spouse A is the owner, spouse B has no legal right over the property, so sposue A could sell, mortgage or gift the property without B's knowledge.

Thanks a lot for sharing terry, very interesting strategy!
Will put more thoughts on this.
 
Terry, I am gona pick ur brain on this...:confused:

I get the benefit of transferring the property to spouse in full, especially in VIC as no duty and if PPOR no CGT.

Related party loan is something that is interesting....

Combine this with a related party loan. Spouse A buys the property borrowing 90% from Bank XYZ. other 10% usually comes from cash. This ties up cash in an investment property and will cost Spouse A money in lost deductions down the track. So Spouse A borrows the remaining 10% from spouse B or a related party. In 6 months as the property increases in value Spouse A increases his/her laon with Bank XYZ and refinances th loan with Spouse B. Spouse B now has more cash left to pay for a new PPOR. Spouse A has increased deductions.

This is how I understand.....pls correct me......Spouse A borrows 10% from Spouse B & 90% from lender so gets tax deduction on 100% IP purposed loan. Revalues the IP down the track and repays the 10% back to spouse B and borrows that 10% from lender (cause of higher valuation). So
spouse B has that 10% back in pocket ready to be used again for similar related party loan or use for ppor.

Initial 10% that spouse B lent to spouse A....how can we prove that these were genuine 10% savings by spouse B and infact spouse B's money & weren't contaminated with spouse A money....if ATO comes knocking....If couples are storing everything in their joint account or something
then can this become tricky...in ur exp have u seen this being challenged...

Also what are the costs we are looking at doing related party loan...ball park figure....i assume lawyers and brokers both will be required..
 
Terry, I am gona pick ur brain on this...:confused:

I get the benefit of transferring the property to spouse in full, especially in VIC as no duty and if PPOR no CGT.

Related party loan is something that is interesting....



This is how I understand.....pls correct me......Spouse A borrows 10% from Spouse B & 90% from lender so gets tax deduction on 100% IP purposed loan. Revalues the IP down the track and repays the 10% back to spouse B and borrows that 10% from lender (cause of higher valuation). So
spouse B has that 10% back in pocket ready to be used again for similar related party loan or use for ppor.

Initial 10% that spouse B lent to spouse A....how can we prove that these were genuine 10% savings by spouse B and infact spouse B's money & weren't contaminated with spouse A money....if ATO comes knocking....If couples are storing everything in their joint account or something
then can this become tricky...in ur exp have u seen this being challenged...

Also what are the costs we are looking at doing related party loan...ball park figure....i assume lawyers and brokers both will be required..

Spouses should maintain separate bank accounts to make this possible. private ruling may be a good idea. Spouse A earning the money and then gifting it to spouse B who then lends it back to spouse B may be seen as a scheme. But if the dominant purpose is estate planning then it could be ok, but PBR for sure.

I charge around $1000 for a loan agreement with some advice.
 
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