Refinance investments for new PPR

[Monja]

Hi

I have two investment properties and a PPR, I am looking in the next couple of years to upgrade my PPR to something bigger, which means I would then have 3 investment properties. I have been thinking about the best way to do this and was going to refinance all 3 of the investment properties and put the equity into the new PPR, therefore making the investment properties negative geared again, but reducing my debt on the PPR.

Based on the above scenario my queries are:
1. is this the best way to go
2. Can I claim my refinancing costs on the investment properties for tax purposes
3. any danges or problems with the above scenario?

Thanks Monja

 

[Propertunity]

I....was going to refinance all 3 of the investment properties and put the equity into the new PPR, therefore making the investment properties negative geared

Monja this action would not make the IPs negatively geared. The extra borrowings are of a private nature - for your PPOR - and therefore not tax deductible.

 

[Perp]

Please don't tell me you've been paying down the balances of these loans rather than putting principal payments in an offset account...

If so, you've created a situation where you're going to have high non-deductible debt, and low deductible debt. Ouch.

 

[Rolf Latham]

Hiya Mon

Sounds like you may need some structuring in terms of selling some of the assets to a unit trust or the like if you are already way down the debt reduction track ?

ta
rolf

 

[Qlds007]

Mhh sounds like a complete mess to me and I would assume as has been already suggested you have been paying down some of the debt rather than utilising a 100% offset product.

Sale to a UT could be a consideration depending on the current value of the security the amount of the existing debt and your marginal tax rate as stamp duty is payable on the Transfer in Qld.

Certainly worth untaggling the mess and crunching the numbers on a Transfer of Title.

At least once done and structured correctly you are free to go and buy again and the interest wont be contaminated against your other securities.

 

[Zeddy]

Please don't tell me you've been paying down the balances of these loans rather than putting principal payments in an offset account...

If so, you've created a situation where you're going to have high non-deductible debt, and low deductible debt. Ouch.

I don't understand - what would be the alternative here? If one has a interest only setup for the IPs, and have been making additional payments to pay down non-deductible debt of the PPoR, what's the catch in revaluing and using the equity to purchase a new PPoR? I do understand the parts of the loan used for the new PPoR would be non tax deductible, but I thought that was unavoidable.

 

[Perp]

I don't understand - what would be the alternative here? If one has a interest only setup for the IPs, and have been making additional payments to pay down non-deductible debt of the PPoR, what's the catch in revaluing and using the equity to purchase a new PPoR? I do understand the parts of the loan used for the new PPoR would be non tax deductible, but I thought that was unavoidable.

No, it is avoidable.

Current PPOR, about to become IP: Loan was $500K, have put $200K extra into it

If you've reduced loan to $300K, when you redraw $200K to put towards new PPOR, then the interest on the $300K balance is deductible, but the $200K you redraw isn't.

If you've left loan balance at $500K and put $200K in the offset, you can take the $200K out of the offset to buy a new PPOR and the interest on the entire $500K is deductible.

I agree that it's ridiculous, but that is ATO policy.

I think that the interest on all borrowings for investment purposes should be retained. eg If you've borrowed $500K for an IP, then regardless of whether you pay it down and increase it again, build a new PPOR, etc, then you should always be able to deduct the interest on (up to) $500K worth of debt, for as long as you hold that investment. Which dollars went into which accounts should be irrelevant.

Think of this horrendous example. You inherit $500K. You pop it into your line of credit, or pay down your IP loan, whilst deciding what to do with the $500K, to save on interest. You decide to build a new PPOR. You redraw the $500K for your new PPOR. NONE of the interest is deductible. But if you'd instead put that $500K into an offset account, and then taken it out again for a new PPOR, ALL of it would be deductible.

 

[Zeddy]

Woah... just wow...

I think I need to re-look at my finance structure.

 

[Jazza]

No, it is avoidable.

Current PPOR, about to become IP: Loan was $500K, have put $200K extra into it

If you've reduced loan to $300K, when you redraw $200K to put towards new PPOR, then the interest on the $300K balance is deductible, but the $200K you redraw isn't.

If you've left loan balance at $500K and put $200K in the offset, you can take the $200K out of the offset to buy a new PPOR and the interest on the entire $500K is deductible.

For sake of examples;

What if the PPOR (left as PPOR) was refinanced to $300k P&I / $200k I/O split loans. Would the '2x new loans' reset both "loan amounts/loan purposes" allowing redraw of up to $200k from 'new' LOC with %100 of the drawn down LOC amount being tax deductible when used for an IP deposit?

Or PPOR > IP refinanced new loan/new lender hence 'new loan/loan purpose' and tax deductible for full amount if property used as IP?

J

 

[Perp]

What if the PPOR (left as PPOR) was refinanced to $300k P&I / $200k I/O split loans. Would the '2x new loans' reset both "loan amounts/loan purposes" allowing redraw of up to $200k from 'new' LOC with %100 of the drawn down LOC amount being tax deductible when used for an IP deposit?

If you redraw $200K from a LOC for an IP deposit, the interest on that $200K is tax deductible for as long as that property's an IP. The point is, though, that however you work it, once you've paid down $200K of the PPOR debt, you can never restore the tax deductibility of that $200K if the PPOR becomes an IP. (Barring a change of ownership, which triggers CGT, stamp duty, etc.)

Your scenario increases your tax deductible debt back to $500K, but on $700K worth of assets ($500K on PPOR>IP, $200K on IP deposit). If you'd not drawn down the $200K, you could have tax deductible debt of $700K on $700K worth of assets.

Or PPOR > IP refinanced new loan/new lender hence 'new loan/loan purpose' and tax deductible for full amount if property used as IP?

No, that won't work because the purpose of the "new loan" is not to buy the property, but to refinance a non-deductible debt.

 

[Jazza]

If you redraw $200K from a LOC for an IP deposit, the interest on that $200K is tax deductible for as long as that property's an IP. The point is, though, that however you work it, once you've paid down $200K of the PPOR debt, you can never restore the tax deductibility of that $200K if the PPOR becomes an IP. (Barring a change of ownership, which triggers CGT, stamp duty, etc.)

Your scenario increases your tax deductible debt back to $500K, but on $700K worth of assets ($500K on PPOR>IP, $200K on IP deposit). If you'd not drawn down the $200K, you could have tax deductible debt of $700K on $700K worth of assets.

No, that won't work because the purpose of the "new loan" is not to buy the property, but to refinance a non-deductible debt.

Understood.

And the only way you could 'catch up' would be to take a 'repayment holiday' and let the extra P&I redraw amount pay for the usual regular repayment until the redraw amount was near exhausted since the PPOR was P&I (wouldn't work for I/O) and is on the way down over time.

Essentially pausing from injecting more funds but still paying off the principal.

That said it would only be feasible for a few years of say under $50k or it would never catch-up.

Not really practical though.

J.

 

[Perp]

Understood.

And the only way you could 'catch up' would be to take a 'repayment holiday' and let the extra P&I redraw amount pay for the usual regular repayment until the redraw amount was near exhausted since the PPOR was P&I (wouldn't work for I/O) and is on the way down over time.

I'm glad you understand, because I don't think this would work...

Anyway, zeddy and I were just discussing this thread via PM, and he said I explained it particularly clearly, and suggested I share this explanation with the forum:

When you take out a loan, it is the purpose of the loan proceeds which determines the tax deductibility (or otherwise) of that loan's interest.

So when you take out a $500K loan to buy an IP, the interest on that entire $500K debt is deductible, because the loan proceeds are used for an income-producing purpose (ie to buy the property).

When you put money into and out of a related offset account, it doesn't "contaminate" the purpose of the original loan funds. So if you put $500K in the linked offset account, reducing your interest to zero for a while, then take $500K out of the offset again, the original loan account's balance hasn't altered, and the loan is "clean", and still deductible. The $500K deposit hasn't "touched" the original $500K loan.

BUT if you put that money INTO THE LOAN ACCOUNT and reduce the balance of the debt, when you increase the debt again - by redraw, for example - the increased amount is treated as a NEW LOAN for the purpose of tax deductibility, and the purpose of the redrawn funds becomes the basis for whether or not the interest on the "new loan" (redraw) is tax deductible. If the redrawn funds are for a PPOR, this clearly fails that test.

So it's all about what triggers the "purpose" test.

Taking out the original loan triggers a purpose test.

Increasing a loan's balance (via redraw, or withdrawal from a LOC), even if (in your mind) it's just withdrawing funds already deposited, also triggers the "purpose" test - for the amount of that redraw/withdrawal.

Depositing funds into and out of a linked offset account doesn't "contaminate" the loan's purpose.

 

[chylld]

Thanks for the clear explanations, I have a question about the following:

Increasing a loan's balance (via redraw, or withdrawal from a LOC), even if (in your mind) it's just withdrawing funds already deposited, also triggers the "purpose" test - for the amount of that redraw/withdrawal.

Depositing funds into and out of a linked offset account doesn't "contaminate" the loan's purpose.

My home loan account has a "surplus" facility, whereby any money deposited into the account beyond the minimum repayment is counted as a "surplus" figure, essentially acting as an offset account. This amount I can withdraw anytime online. All this while, the account has a "limit" figure equal to the original loan amount, and a "balance" figure which is limit - offset (and this is what the interest is calculated on.)

However, would this possibly be risky from a redraw purpose perspective?

 

[Rolf Latham]

Hiya

Acting as offset and offset are 2 different things

Sounds like a redraw loan to me

What lender and product is it please ?

ta
rolf

 

[chylld]

Hiya

Acting as offset and offset are 2 different things

Sounds like a redraw loan to me

What lender and product is it please ?

ta
rolf

I suspected as much, I definitely want to play it safe especially as a "proper" offset account will only cost $15/mth.

Lender = bankwest, product = rate tracker ultra

 

[chylld]

just got off the phone with my financial adviser... unfortunately yes the money i have in there will count as a redraw when i move it out of the home loan account and into the offset account

just means i have to use it for income-producing purposes, oh well... not an ideal result, but manageable, and i think i don't lose anything as long as that money is always used for investment purposes.

wish i found these forums a bit sooner though!!