Selling half of property to wife

[thegoat]

Hi guys,

I posted last year on this question and received some advice, however we haven't done anything since then. We're now thinking about moving into a new PPOR again and looking at the same situation as last year (see post http://somersoft.com/forums/showthread.php?t=102776)

Basically we'll be turning our current PPOR into an IP and moving into a new PPOR. House is now worth around $480K with a loan of around $240K.

In order to maximise our 'deductible debt', I was told last year that my wife should sell me her half of the property. In essence we were told that I borrow $240K (half of current property value) to 'pay' her out. She then pays me back her half of the mortgage ($120K). This would leave us with a loan of $360K and $120K in the bank which we could then go and use as a deposit for another house. The total loan of $360K is then tax deductible.

What I'm trying to work out is why is this different to just 'topping' up the loan. For example, borrow up to 80% of the current value, meaning we could borrow up to around $380K. This would leave us with obviously a loan of $380K and $140K to use as a deposit for another house. I believe under this scenario however only the original loan of $240K is tax deductible.

So why is this different to me buying her out? Both scenarios result in similar loans ($360K vs $380K) and similar amounts of money to use for a new PPOR ($120K vs $140K). Why is it in the first scenario the full $360K is tax deductible but in the second scenario only $240K is tax deductible?

Cheers

 

[Terry_w]

Why is it in the first scenario the full $360K is tax deductible but in the second scenario only $240K is tax deductible?

Cheers

You can only claim interest on a loan that was used for investment or business purpose. When you are buying your wife's house you are borrowing to acquire property.

The interest on the loan for this will be deductible once the property is rented out because the loan was used to acquire an income producing asset.

With the topping up the purpose of the loan will depend on what the money is used for - which in this case will be the purchase of a new PPOR down the track. This is a private expense and the interest will therefore not be deductible.