Shifting equity to IP to reduce loan, prior to making it a PPOR

[Land]

Hi all,

I got a bit of a strategy which I want to run by you all.

In about 3 years, we're thinkinig of harvesting a fair proportion of equity from all of our 3 of our IP's to substantially pay down the loan on our fourth IP, before we move into it to turn it into our PPOR.

Now, I know that if we move in and make it our PPOR, then any equity we pull from our other 3 IPs to pay down the PPOR loan is being used for a non-tax deductible purpose, and therefore the refinanced funds againist the 3 IPs will NOT be tax deductible.

HOWEVER, if the refinanced funds against the 3 IPs is used to pay down the loan on the fourth IP BEFORE it becomes our PPOR, can I assume that the refinanced funds raised against the 3 IPs remains tax deductible because at the time the debt was acquired against the 3 IPS it was used to pay down the fourth house when it was still an IP?

 

[Rolf Latham]

Hiya

Dont like the chances, since the loans were drawn for paying down loans on the other property

But hey, im often wrong but never in doubt

ta
rolf

 

[Land]

Thanks Rolf,

But the point would be that before we move in and one IP becomes our PPOR, it's just an exercise in shifting debt around 4 IPs (which rsults in a very small loan against 1 of the IPs and larger loans against the other 3), so the purpose of the debt is always for investment purposes and therefore always tax deductible.

The question is, once we move into the IP with the small loan against it and it becomes our PPOR, does the debt against the remaining 3 IPs which was used to pay down the loan on the fourth IP, lose it's tax deductiblility?

What if you turned the fourth IP into our PPOR after 6 months, 1 year, or even 3 years?

 

[LynnH]

Land


It all hinges on the purpose of the loans.

If you take out new loans on IPs 1, 2 and 3 to pay down the loan on IP 4, then interest is tax deductible because the purpose is to finance an income-producing asset. However, when IP 4 becomes your PPOR, the interest on the new loans on IPs 1, 2, and 3 is no longer taxable because IP 4 is no longer an investment. The time frame is irrelevant - it's the purpose which determines deductibility.

Cheers
LynnH

 

[marg4000]

I would run this past a good accountant, or even contact the ATO.

The ATO has one over-riding principle - if something is done simply to avoid tax then it is a no-no.

It would be hard in your case to advance any other argument if push comes to shove.
Marg

 

[Terryw]

Maybe you could get a bit creative to get around potential issues. eg. Set up a LOC on one of the properties and borrow to pay interest and other expenses on the 3 investment properties - leaving more of your cash available for the new PPOR.