Shifting equity between properties

[aw1]

Hi

Lets say you have Property A which was originally purchased with a $500K mortgage.

Property B was purchased with a $300K mortgage.

They are cross-securitised i.e. there is a Mortgage registered against Property A for Property B and vice versa.

You now want to sever this link and have one property with one bank and the other with another bank.

However, Property B has an LVR of 85%. Property A has an LVR of 70%.

In order to go ahead I will now need to shift some equity from Property A into Property B the next time I refinance Property A.

Now, lets say I move $50K from A -> B to bring B's LVR down to 80%. This is great and I can now have the two properties with separate banks and they are no longer cross securitised.

Both Property A and Property B are investment properties.

For tax purposes, is the interest deductible on Property A now the interest on $550K or is it still $500K. To ask the same question a different way, is the interest claimed as a deduction on Property B $300K or is it now $350k.? I am trying to understand how you attribute the interest deductions to a particular property when you are shifting equity around.

To further extend this to make it more useful, lets say you have 20 properties, how would you BEST choose which property from which to refinance and take cash to put into another of the properties to bring the LVR down? Some are cashflow positive, others, neutral, others negative. Obviously you want the best tax benefit..

Any thoughts?

Regards
Adam

 

[Rixter]

I would say shifting equity from one to the other would be viewed by the ATO as a payment of principle, and as such not tax deductible.

 

[aw1]

That's difficult to understand. You still have the same amount of debt and the purpose of it is still investment and not to gain a tax benefit.

 

[Rixter]

That's difficult to understand. You still have the same amount of debt and the purpose of it is still investment and not to gain a tax benefit.

I think the ATO may view the purpose of the loan (from A across to B) as being not for income producing purposes...rather repayment of principle on loan B.

Some times what one see's and the what the ATO see's can be two different things.

I would be searching/contacting the ATO for written verification.

 

[Mary-Sue]

say I move $50K from A -> B

Sounds easy enough but that's not what the ATO is going to see. I reckon they might see a CGT event.


You get a tax deduction for the 50K loan if it is used to produce assessable income.


"Shuffling" and "shifting" and "moving" the 50K to satisfy Bank LVR hurdles doesn't produce any extra income over what you already declare that you pay tax on at all.


I reckon Part IVA would be applied here and you'd be snookered. Julia will be along any minute to clarify I'm sure.


If you want to uncross, either pump up the V or lower the L.

 

[Rixter]

I reckon they might see a CGT event.

Can you please explain how this would trigger CGT if theres been no sale?

 

[Y33]

Are both loans currently with the same bank?

Not sure how this works but maybe try the following.

You might be able to combine the loans into one.

Then go to the second bank and tell them you want to refinance one property and need it at an LVR of 80%.

Tell the first bank you are paying so much off the loan and want to clear the title on 1 property as your LVR is now %. There may be additional costs.

The first bank if not comfortable with the idea might ask for LMI but this is only guess work.

 

[burty85]

Sounds easy enough but that's not what the ATO is going to see. I reckon they might see a CGT event.

This makes no sense...

If you want to uncross, either pump up the V or lower the L.

This does...

Other than that, I am all out of ideas...

 

[aw1]

If you want to uncross, either pump up the V or lower the L.

V has gone up but not quite enough.

Lowering the L exactly what I'm trying to do through this question

I don't see what anti-avoidance has to do with this. I am gaining no tax benefit from doing this and the amount borrowed has not changed.

 

[Y33]

If the equity is being moved from one IP to another IP and the loan amount is still the same it doesn't appear to be tax avoidance. If you were moving it from a PPOR to IP then questions would be asked. Basically you are still trying to claim a deduction on the same amount so I don't see where the tax avoidance comes in.

Still looks as if your best option is to go one loan and then split it into 2.

There appears to be some confusion in the post as it is 3 questions but some are seeing it as one.

1) Can you change LVR through equity swap?
2) Does the interest get charged on original amounts or adjusted LVR amount?
3) How to get the best tax benefits from a mixture of + - and neutral properties?

 

[Rolf Latham]

Hiya AW

This is the sort of stuff that comes across our tables on at least a weekly basis.

What you are looking at doing is "complicated" in terms of "implications" but can be relatively simple in action.

Ignore tax issues for a minute

provided the NEW money released as part of the refinance process is all used for investment purposes, or to repatriate existing investment there are no tax implications. You wont be better or worse off................you are replacing like for like.

I am assuming that all your properties beneficial ownership is the same, thus all income and all deductions end up in the same bucket.

What you want to do i feel is talk this through with a good independent broker and ALSO your tax adviser to make sure you have all the bases covered

\ta
rolf

 

[The Wild One]

I think this is a quote from "Rental properties and Taxation", by Tony Cromton, which is missing from my book shelf ?? mmm.

Quote: You can mix your income producing loans up like a glass of cordial, as long as the colour and taste stays the same. Quote:

 

[Qlds007]

As Rolf has mentioned the untangling of the previous mess may look ugly on paper but is standard practise for most investment related mortgage brokers.