Question - Using Equity

[type_one]

If you pull some of the equity out of one investment property to fund a deposit on another new investment property and borrow the rest, then at some point in the future move in to the new investment property, what happens as far as tax deductibility on the amount you used for the deposit. I know you couldn’t claim anything on the new amount borrowed but what about the deposit amount that is technically being claimed against the first investment property.

For example IP 1 worth $300k with a loan amount of $100k and you pull out $50k to fund a deposit on IP 2 bringing the loan amount on IP 1 to $150k.

IP 2 is worth say $300k with new loan amount of $250k and the deposit amount from IP 1 of $50k.

If IP 2 then becomes a PPOR, I understand you couldn't claim the $250k as this was secured to IP 2. But what about the $50K from IP 1. Can this still be claimed against IP 1. Or do you not claim that amount as well given the money is technically tied up in IP 2 (now the PPOR) even though IP 1 is the security.

 

[LynnH]

type_one

Deductibility is determined by the purpose of the loan. If the equity used for the deposit is used to buy an IP, then the interest is deductible. When the IP becomes your PPOR, the interest is no longer deductible. The security used for the loan is irrelevant in determining deductibility.

Cheers
LynnH

 

[GZM]

This is something that has always confused me...

If the purpose of taking out the loan is the real test, then shouldn't the interest be deductible if you borrow with the purpose of buying an IP, regardless of whether you later "convert" that IP to a PPOR. The purpose when you took out the loan was to buy an IP...

I know that this is incorrect - but there must be something more than just the purpose that is relevant.

Can somebody explain?

 

[Bricks & Mortar]

This is something that has always confused me...

If the purpose of taking out the loan is the real test, then shouldn't the interest be deductible if you borrow with the purpose of buying an IP, regardless of whether you later "convert" that IP to a PPOR. The purpose when you took out the loan was to buy an IP...

I know that this is incorrect - but there must be something more than just the purpose that is relevant.

Can somebody explain?

And when that purpose of the loan changes to PPOR
then too wouldn't the deductability or abilty to claim change.

 

[LynnH]

OK, lets look at it another way. You buy a PPOR - interest is not deductible. Your PPOR becomes an IP, then the interest component of the loan remaining on your PPOR becomes deductible from the day it becomes an IP. (For illustrative purposes, I assume that no personal debt has been mixed into the loan - then it becomes messy).

You buy an IP. Interest on the loan taken out to provide the deposit + interest on the IP loan are both deductible. The IP becomes a PPOR and the interest is no longer deductible. The purpose of the borrowings was to buy an investment - when the property is no longer an investment, interest is no longer deductible.

In both cases, interest is deductible while the property is an IP - but not when it is a PPOR.

Perhaps one of the forum's accountants could point us in the direction of some references???

Cheers
LynnH

 

[stumunro]

Lynn H is spot on, the interest is deductible while it's an investment.

the whole purpose behind deductibility is because you are offsetting a loss against an investment. as soon as you turn the investment into a ppor you are no longing treating that property as an investment.

 

[type_one]

I thought that was the case. Thanks all for confirming. I didn't want to suggest that answer in case I influenced the answer. It makes ense to me. Just makes it harder to juggle all the loans.