PPOR with LOC reno into IP

[civi_joe]

Hi,
I have a loan on my PPOR of 370k with a LOC of an additional 40k. I have spent this 40k on renovations to the house and now I plan to move out and turn it into an IP. I will take out another LOC on this house to use as a deposit on the next one. When the property turns into an IP is the interest on the full 410k tax deductible, or just on the 370k portion? Should I reorganise this into a single 410k loan + a seperate one for my deposit on the new house?

Thanks

 

[Peter_Tersteeg]

The LOC credit should be tax deductible as it's been used for investment purposes and this will continue.

Reorganising the loan structures as you've indicated might be a little more convenient, but could pose a problem if you were ever to move back into this property.

 

[Terry_w]

I agree with PT. The LOC interest should be deductible because you have used it for the property and this property will be income generating. This will depend on a few things though so seek advice.

 

[S.T]

Seek some specific tax advice, but I dont believe the 40k spent on renovations whilst still living in the property can be tax deducted.

 

[Terry_w]

Seek some specific tax advice, but I dont believe the 40k spent on renovations whilst still living in the property can be tax deducted.

This money was borrowed to improve the property. If the property, the same property, then becomes an investment property the interest on this borrowings should be deductible as it relates to expenditure incurred in prducing an income.

 

[S.T]

Thanks for clarifying Terry. I just thought the timing was important here, considering the OP was still living in the property when the renovations were carried out.

I thought he would have needed to move out first, renovate, then rent the property to be able to claim the interest.

 

[Terry_w]

Thanks for clarifying Terry. I just thought the timing was important here, considering the OP was still living in the property when the renovations were carried out.

I thought he would have needed to move out first, renovate, then rent the property to be able to claim the interest.

No because it is the purpose that counts and the purpose is construction/improvement of the property.

Then when the property becomes income producing the associated costs should be deductible.

Some people think because it is private residence at the time this is a private expense - it is at that stage, but later becomes and investment expense.

Its like borrowing to buy a house you live in. When you rent the house later the interest will be deductible. (providing no redraws or loan increases).

 

[mumbai]

What would be the tax implications when the same IP turns back into PPOR in some years?
Silly question???

 

[Terry_w]

What would be the tax implications when the same IP turns back into PPOR in some years?
Silly question???

THe interest on both loans, main and LOC, would no longer be deductible.

 

[civi_joe]

Thanks for the info guys. The purpose of the renovations was to increase the rental yield. Looks like I might need to find an accountant this year to do my tax

 

[KJB]

No because it is the purpose that counts and the purpose is construction/improvement of the property.

Then when the property becomes income producing the associated costs should be deductible.

Some people think because it is private residence at the time this is a private expense - it is at that stage, but later becomes and investment expense.

Its like borrowing to buy a house you live in. When you rent the house later the interest will be deductible. (providing no redraws or loan increases).

What if (when still a PPOR) the LOC is capitalising interest? When it converts to an IP would the whole amount (including the Cap interest portion) still be tax deductible?

 

[Terry_w]

What if (when still a PPOR) the LOC is capitalising interest? When it converts to an IP would the whole amount (including the Cap interest portion) still be tax deductible?

Generally yes under s8-1. Interest on interest is treated as the underlying interest is. i.e. if interest is deductible capitalised interest would be.

But beware of the ATO applying Part IVA and denying the deduction.

 

[albanga]

Thanks for the info guys. The purpose of the renovations was to increase the rental yield. Looks like I might need to find an accountant this year to do my tax

Out of curiosity why would you not always be having a professional do your tax returns?

 

[civi_joe]

Out of curiosity why would you not always be having a professional do your tax returns?

At the time I just had a wage and no IP so it was pretty straight forward