Tax and subdivision of investment property

[rprodrive]

Hi guys

I have an investment property that sits on a decent sized block (1000sqm) in Melbourne. It has a loan of about $1m and is currently tenanted. The interest on the loan is obviously deductable.

I am now considering subdivision of the property that will see 2 parcels of land - the first, will be the front of the block with the existing house untouched. That house will remain tenanted and an investment.

The second parcel will be essentially the backyard of the existing house (vacant land) and I plan to build a new home - where I will live. I will need to borrow $300k to build the home.

Now I don't have a problem with interest on the $300k not being deductable.

But I would like to find a way, if possible, to ensure that the interest on the original $1m loan remains deductable. Is there a way?

I will need to speak to an accountant about this - but interested in your views in any event.

Many thanks

 

[RumpledElf]

I just asked this question last week and was left assuming that the land portion of the original loan should just be put in with the building loan so it isn't tangled up in the original IP loan. For me, the undeductable difference pushes the house from being quite positively geared to ridiculously positively geared and means I will have a PPoR debt much higher than two COMBINED IP debts.

Would be interesting if there really was a way to keep it with the old house but I think that is playing sneaky buggers.

 

[dr.jauncey]

Hi, generally speaking the portion of the loan relating to what will become your private main residence will not be deductible once such change in use occurs.

An idea. This may also apply to RumpledElf. Upon clearance of subdivision the original loan for the property in question should be refinanced into separate and applicable portions for clarity. This is only prudent. Then if another property was to be sold from one spouse to another then the purchasing spouse will be able to borrow maximum funds to do so. Selling spouse can then use those funds to pay down personal debt without affecting the deductibility of the purchasing spouse's new loan. That personal debt has been separated from the investment debt in the refinancing process above. Choosing your previous main residence as the property to be sold from one spouse to another works particularly well as both stamp duty and capital gains tax may be avoided and the purchasing spouse may now use that property as an investment and claim the full amount of interest on the debt required to purchase it from their spouse.

Just a thought. It may not be relevant. Consult your accountant before doing anything.