Security subtition from PPOR to IP

Hi,
A while ago my partner and I sold our PPOR. We are both self employed and the serviceability of a new mortgage we always fall short. So we chose to transfer our mortgage. Therefore with a portion equal to our mortgage, once our PPOR was sold the bank placed the money in a term deposit and serured the mortgage against the term deposit while we looked for an IP.

What the bank failed to explain, and something I should have seeked independant advice over (hinsight is a wonderful thing). Was that we had to pay the full amount of the property, the bank the. moved the mortgage across to the IP. Under this circumstance. Is the interest on the mortgage, that is now secured against the IP tax deductible?
Thanks for your help!!
 
I don't think it would be deductible.

The interest you are making on the loan is less than the interest you are receiving on the deposit, with no prospects of a capital gain.
 
Hi Terry,
Thanks for the response.

I was more asking now that the mortgage has been transferred to the IP we have brought, would the interest on the mortgage now be tax deductible?

My biggest concern and why I'm an questioning if it is tax deductible or not, is that we have had to pay for the property in total ourselves - then the mortgage was secured (transferred) against the property. The term deposit was released so we could pay for the property, as well as the mortgage transferred on the day of settlement of the IP.

However, there is no way I would have applied for the security substitution if the interest on the mortgage wasn't tax deductible, as it was purely for the purpose of gaining IP's. We now rent and dont have a PPOR.

Hope you or anyone can help or have had experience with security substitutions.
 
If you pay for something yourselves and then the loan is secured over the property and money from the loan refunded to you then the interest would not be deductible. This is because the borrowed funds were not used to acquire the property.
 
I'm with Terry on this - security substitution should be used for PPOR transfer where there isn't a tax implication.

The bank has allowed you to transfer the debt to the new security, but it's still the same loan which was used to purchase the previous property.
 
I'm still confused...So I will repeat my understanding. Correct me if I'm wrong.

You had a IP and part of the security for your IP was the security of your own PPOR. There was also a loan foe the IP secured by the IP. You wanted to sell the PPOR but the bank has issues with loss of security. They didn't thinbk the IP security alone was enough. So bank put $$ on deposit from the sale of the PPOR and held this as part of the security over the IP....

Q : Is the IP loan deductible ??

I think it is. Ignore what the loan security is. Was the whole of the loan proceeds used to buy the IP ??

Can you increase the loan by borrowing more of the PPOR ? No. Only the borrowed proceeds used to acquire are deductible.
 
Paul I believe this is whats happen.

LOAN A used to buy PPOR

PPOR sold LOAN A security substituted to TERM DEPOSIT

TERM DEPOSIT used to buy IP and LOAN A now secured by IP


Therefor IMO it was cash used to buy IP not LOAN A.

As LOAN A is and always was used to buy PPOR.
 
Brady - Ahhh.

Was this a fixed rate loan ?? So the bank avoided a trigger for the payout cost ?? Otherwise its makes no sense to not resettle the loan. Its fatal to any deduction for sure. The lender has jeopardised the deductibility. Liability ?? How is the mortgage still OK ?? The loan was for another property not the one advanced ?? This is why lenders resettle mortgages even if its the same lender.

Otherwise why not just change names on mortgages too ??

I can be thick but something isn't right
 
Sounds like they couldn't afford the new loan, thought it would be good idea to security substitute but didn't think of the consequences. Potential error by the bank and the OP.

OP how much has your serviceability changed? Would have to be a fair amount to go from affording a PPOR which isn't deductable to not being able to show can afford a IP when PPOR is sold.

What your current living arrangement, are you now renting somewhere? What's the rent you're paying in comparison to the rent you're receiving?
 
Sounds like they couldn't afford the new loan, thought it would be good idea to security substitute but didn't think of the consequences. Potential error by the bank and the OP.

OP how much has your serviceability changed? Would have to be a fair amount to go from affording a PPOR which isn't deductable to not being able to show can afford a IP when PPOR is sold.

What your current living arrangement, are you now renting somewhere? What's the rent you're paying in comparison to the rent you're receiving?

Hi Everyone,
The new let me try and answer the questions. ok
We sold PPOR for $800,000 with mortgage debt of $300,000
we sold PPOR and the mortgage of $300,000 was secured against cash of $300,000 placed in term deposit
We brought IP for $670,000 paid out of original $800,000 we received and the mortgage debt was transferred to the IP.

Our current living arrangement is we rent a house for $650 a week. The rent we are about to start receiving is $590 per week.

From the sounds of things my suspicions were right and the bank have screwed us with there advice. I now need to somehow get this mortgage changed/refinanced to be a mortgage over the IP. As the rental income received will now also have implications on out income tax. BUGGER!! Any advice on how to make this equation work (just assume we can service a loan) would be fantastic.
 
100% non-deductible.

Cannot be fixed without one spouse selling to the other and refinance that reacquisition. You are in Vic so are lucky I suspect. The fine numbers need to work but there is a solution that doesn't involve duty.

Get tax / legal advice on doing that.
 
From the sounds of things my suspicions were right and the bank have screwed us with there advice. I now need to somehow get this mortgage changed/refinanced to be a mortgage over the IP. As the rental income received will now also have implications on out income tax. BUGGER!! Any advice on how to make this equation work (just assume we can service a loan) would be fantastic.

What advice did the bank give you, by the sounds of things you wanted to sell and buy a new property. You couldn't show that you could service the mortgage so you chose to transfer your mortgage. The bank shouldn't of been giving you specific tax advice. Did you speak to your accountant before completing the purchase and discuss your plans?

Hi,
A while ago my partner and I sold our PPOR. We are both self employed and the serviceability of a new mortgage we always fall short. So we chose to transfer our mortgage.
 
Hi Brady,
Would love to say we did consultant and accountant. However we didn't as we dont have a good one.

What if I, and I'm thinking outside the square now.

Draw down money from the IP $300,000 and pay out the current mortgage.
Then apply for an IP mortgage against this property to payback the money drawn out of it. If this is possible, would the new IP mortgage be claimable?
 
I'm sure you have learnt some good lessons in this.

Refer to Paul's post can't be fixed without sale.

Purpose of the funds determines deductibility. What the debt is secured against is irrelevant.

If you draw down funds to payout the original funds, it's still the same purpose. The transaction has already occured, you have purchased the property. You used cash to do this, so I can't see any deductability in this.

As mentioned if you're in VIC you has spouse transfer which other states don't have. Recommend getting specific tax and legal advice as suggest and fix this up ASAP.
 
100% non-deductible.

Cannot be fixed without one spouse selling to the other and refinance that reacquisition. You are in Vic so are lucky I suspect. The fine numbers need to work but there is a solution that doesn't involve duty.

Get tax / legal advice on doing that.

I agree completely! Not deductible and cannot be fixed - other than a sale.
 
Hi Everyone,
The new let me try and answer the questions. ok
We sold PPOR for $800,000 with mortgage debt of $300,000
we sold PPOR and the mortgage of $300,000 was secured against cash of $300,000 placed in term deposit
We brought IP for $670,000 paid out of original $800,000 we received and the mortgage debt was transferred to the IP.

Our current living arrangement is we rent a house for $650 a week. The rent we are about to start receiving is $590 per week.

From the sounds of things my suspicions were right and the bank have screwed us with there advice. I now need to somehow get this mortgage changed/refinanced to be a mortgage over the IP. As the rental income received will now also have implications on out income tax. BUGGER!! Any advice on how to make this equation work (just assume we can service a loan) would be fantastic.

Not quite so clear cut.

When you sold the PPOR, the Commissioner may deem you to have repaid your loan (TR 2000/2 para 37).

Your task is now to clearly demonstrate that the banks funds of $300k were used to acquire the IP.

If the Commissioner can deem a repayment of the loan from the recouped funds, then by his reasoning you could argue that the $300k security now released is a "redraw". You may be able to demonstrate that $300k term deposit previously used as loan security was now used to purchase the IP.

This argument may be stronger if you can show that $300k of the PPOR sale was deposited as security for the outstanding mortgage and then this deposit amount was directly applied to the purchase of the IP without mixing with other accounts at any time.

You need the assistance of a tax lawyer to analyse and draft an application for a private ruling based on your particular circumstances.
 
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Hi Rob and everyone,
Thankyou for your responses, Rob definately something to look in to. I will now contact a property lawyer to make sure I am on the right track.

I have since spoken to a financial adviser and our accountant of which they feel the interest on the loan is in fact deductible from the time it was switched to the IP.

The financial adviser said it is because the purpose of the loan has changed and allowed us to buy the IP. He used the example of when you have a PPOR with a mortgage and you decided to rent the property out. From the moment the PPOR turns into a IP the interest is claimable even though the mortgage is the same. He was clear that the security of the mortgage doesn't matter what property it is attached too, but the purpose of that property.

The accountant was even less interested in the details, she just asked is the mortgage wholey attached to the IP? then it is treated as in investment mortgage, as the debt enabled the purchase of the IP even though the mortgage was not new to the property.

I just hope they are right!! In the meantime though I will contact a property lawyer, as it is on my head if i get this wrong.
 
Hi Rob and everyone,
Thankyou for your responses, Rob definately something to look in to. I will now contact a property lawyer to make sure I am on the right track.

I have since spoken to a financial adviser and our accountant of which they feel the interest on the loan is in fact deductible from the time it was switched to the IP.

The financial adviser said it is because the purpose of the loan has changed and allowed us to buy the IP. He used the example of when you have a PPOR with a mortgage and you decided to rent the property out. From the moment the PPOR turns into a IP the interest is claimable even though the mortgage is the same. He was clear that the security of the mortgage doesn't matter what property it is attached too, but the purpose of that property.

The accountant was even less interested in the details, she just asked is the mortgage wholey attached to the IP? then it is treated as in investment mortgage, as the debt enabled the purchase of the IP even though the mortgage was not new to the property.

I just hope they are right!! In the meantime though I will contact a property lawyer, as it is on my head if i get this wrong.

A property lawyer will be just as useful as the financial planner. you should seek out a tax lawyer.
 
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