Tax dilemmas!

[Shoryuken]

Hi All,
I'm a new member on this forum and only a newbie in the investment world. I know that a lot of members on this forum are very knowledgeable and would appreciate some feedback on how to make the best of our current situation.

2009 - Bought Property A - PPOR - LVR $200K
Until 05/2013 - Had paid back $80K on Property A (loan balance was $120K)
05/2013 - Re-financed Property A - still PPOR - LVR back up to $200K
06/2013 - Bought Property B - new PPOR - LVR $500K (Used the $80K for from Property A's re-finance for deposit for Property B)
06/2013 - Property A is now an IP (after we settled and moved into Property B)
05/2014 - Bought Property C - IP - Purchase price $400K and LVR 90%

Now we went to do the tax return recently and we were being told that tax deduction (Property A) can only be claimed on $120K. It came as a shock but I've done some reading on the forum and this question has been asked a few times before and I understand that I cannot claim tax deduction on $200K. But my main question is, as we bought another IP this year for which we paid $40K + $14K approx. stamp duty. Can we actually claim tax deduction for the interest paid on Property A for $174K? ($120K = Property A's original loan and $54K to buy our second IP this year). The only issue is there's a good 11 month gap and the ATO can obviously ask where was the money for 11 months.
So, I'd appreciate some suggestions on how to best handle this if I have any options at all other than biting the bullet and just claim tax deduction for interest paid on $120K for Property A

Thanks everyone for your time.

 

[Terry_w]

You can only claim the interest on money borrowed for investment purposes.

The $200k loan related to a property purchase but you paid it down to $120k. So only $120k of this loan relates to the property. $80,000 relates to a new property which you live in. So on the face of it only $120k portion would be deductible (just the interest). Assuming the loan is IO and has been all the time. 60% of interest incurred would be deductible. Assuming no payments have been made into the loan. ie PI payments.

Where did the $54k deposit for property C come from?

 

[Shoryuken]

Thanks Terry. The Property A loan was originally a PI type loan but when we re-financed we changed it to IO. Both Property B and C are IO loans too.

$54K deposit is from a bit of leftovers from property A re-finance + our savings over the last 10-11 months.

EDIT: I should also add that the leftovers of re-finance were sitting in the 100% offset account of Property B (our current PPOR). This account is where the bank directly transferred the "surplus" funds when we did the re-finance.

 

[Terry_w]

I would say money for property C not deductible based on info at hand.

 

[Shoryuken]

Thanks Terry. So we just bite the bullet and claim tax deduction on $120K then. Been reading up a bit on the forums and learning a lot of new things. I guess from now on I'll be very careful in how all the future finances are structured.

Do you have any advise on how to improve the tax deductibility of Property A in future? The property is positively geared (upwards of 7% calculated at 105% = $262,500). I should also add that my wife and I are joint tenants so own 50% share of it each. The issue is if the tax deduction on interest is too low then I end up paying big tax on it as I'm on a higher income. On the other hand, my wife is on a low income, so she's fine with the positive gearing aspect of it.

One good thing I just discovered is that all my three loans are separate, there is not cross colleteralisation. I didn't ask for this (I should have) but my broker set up separate loans anyway which I believe is a good thing.

Thanks again.

 

[Terry_w]

You could possibly borrow to pay all expenses such as rates etc. The money you would have used can be used to pay down non deductible debt or invested in the spouse's name so less tax paid on the income.

 

[Shoryuken]

Thanks Terry. I'm confused though as to how do I pay up the non tax-deductible portion of the loan? Currently it's one loan of $200K, so does that mean it's not cross colleteralised? Let's say for argument sake I repay $10K back to bring the loan down to $190K. How do we know if that $10K goes to the tax deductible $120K or to the non-tax deductible $80K? Or does it go according to ratios i.e. $6K towards $120K and $4K towards the $80K?

Sorry for too many questions, I'm just very new to all this and quite confused

 

[Terry_w]

Thanks Terry. I'm confused though as to how do I pay up the non tax-deductible portion of the loan? Currently it's one loan of $200K, so does that mean it's not cross colleteralised? Let's say for argument sake I repay $10K back to bring the loan down to $190K. How do we know if that $10K goes to the tax deductible $120K or to the non-tax deductible $80K? Or does it go according to ratios i.e. $6K towards $120K and $4K towards the $80K?

Sorry for too many questions, I'm just very new to all this and quite confused

If it is one big loan then any repayment will come off all portions of the loan. It is like mixing orange juice and milk. If you remove 10mil of liquid it would be partially milk and partially orange juice. If you want to pay one portion off independantly you would need to separate the orange juice and the milk.

I used to use urine in my analogies, but someone said it was not tasteful.

 

[Shoryuken]

Haha, that explains perfectly! Still laughing thinking about the urine analogy

We might perhaps look at splitting the loan as we were considering fixing it, we might only fix the tax deductible $120K and leave the other part as variable with an offset account. Then put in some money in the offset account as and when we have it. If such a split is possible, that is!

 

[Paul@PFI]

Thanks Terry. So we just bite the bullet and claim tax deduction on $120K then. Been reading up a bit on the forums and learning a lot of new things. I guess from now on I'll be very careful in how all the future finances are structured.

Do you have any advise on how to improve the tax deductibility of Property A in future? The property is positively geared (upwards of 7% calculated at 105% = $262,500). I should also add that my wife and I are joint tenants so own 50% share of it each. The issue is if the tax deduction on interest is too low then I end up paying big tax on it as I'm on a higher income. On the other hand, my wife is on a low income, so she's fine with the positive gearing aspect of it.

One good thing I just discovered is that all my three loans are separate, there is not cross colleteralisation. I didn't ask for this (I should have) but my broker set up separate loans anyway which I believe is a good thing.

Thanks again.

You could sell your 50% to spouse IF its a PPOR for BOTH of you on the day you do it. No duty. I don't recommend a sham PPOR either. Change residence for six months ??

 

[Shoryuken]

Thanks Paul, I had no idea that there'll be no stamp duty if we changed ownership ratios while we are both living there. I always thought that it would always incur stamp duty if we changed the ownership ratios.

While moving back there for 6 months will be a daunting prospect, we can certainly think about it. It will also mean that we'll need to rent out our current PPOR for 6 months.

Although, it's great to know that there are options!!

I've got one more question. Do ATO have a fixed guideline on what is an acceptable timeframe for re-financing/topping up a PPOR, using the surplus funds for personal or non-investment use and then converting the PPOR to IP and claiming tax deduction on the full loan? In my case it was only 1 month, so clearly not enough time but let's say if the gap was 1 year, would that be okay?

 

[jrc]

The exemption from stamp duty in Nsw is where husband and wife end up with joint ownership of the PPOR not where one transfers a 50% interest to the other 50% owner

http://www5.austlii.edu.au/au/legis/nsw/consol_act/da199793/s104b.html

 

[Terry_w]

I've got one more question. Do ATO have a fixed guideline on what is an acceptable timeframe for re-financing/topping up a PPOR, using the surplus funds for personal or non-investment use and then converting the PPOR to IP and claiming tax deduction on the full loan? In my case it was only 1 month, so clearly not enough time but let's say if the gap was 1 year, would that be okay?

This is never acceptable.

The deductibility of interest will depend on the purpose and use of the funds borrowed. If used for personal items then the interest on this increase will never be deduction. security for the loan doesn't matter.

 

[Shoryuken]

This is never acceptable.

The deductibility of interest will depend on the purpose and use of the funds borrowed. If used for personal items then the interest on this increase will never be deduction. security for the loan doesn't matter.

Got it! Thanks again Terry.

 

[Paul@PFI]

The exemption from stamp duty in Nsw is where husband and wife end up with joint ownership of the PPOR not where one transfers a 50% interest to the other 50% owner

http://www5.austlii.edu.au/au/legis/nsw/consol_act/da199793/s104b.html

That is one way..Yes. Often hard to get all the circumstances set especially the PPOR issue. Often a great strategy just prior to moving from the PPOR and it starts as an IP. And it can be used to transfer (sell would be better) a 50% interest from one spouse to the other (ie from 100% to 50/50).

Also the JT to TIC change

Apparent purchaser ?
Partitioning ?

There are other ways too. There are many incorrect assumptions in the property world...like the view that property can only access one land tax threshold.

 

[Paul@PFI]

Thanks Paul, I had no idea that there'll be no stamp duty if we changed ownership ratios while we are both living there. I always thought that it would always incur stamp duty if we changed the ownership ratios.

Often yes. There are preconditions . That where seeking advice pays. You cant just change from 50% to 70% etc. Then again there is always a CGT issue with that as well.

 

[TFE]

My wife currently owns the unit we live in, value 800k, current loan is 270k. We borrowed a further 279k to fund our deposit for our next PPOR (which will be an IP until we move in there 2 or so years). We want to convert property A into an IP when we move to property B. I want to buy 50% of property A and increase the deducability against it.

Using s104B can someone explain how we do this? I spoke to my mortgage broker and she says I can't borrow money to buy 50% in my name only, that all loans against 1 property need to be in both names. Has anyone actually done this and can give some advice about it? Also with regards to the tax implications or links to a ruling?

Basically I want to borrow 400k, give it to my partner to pay off the 279k non deductable loan, and have a fully deductable loan against property A.

Cheers

 

[wylie]

I suggest you post your question with an appropriate heading and start a brand new thread. You will get more answers than piggy backed on this older thread.

 

[Terry_w]

My wife currently owns the unit we live in, value 800k, current loan is 270k. We borrowed a further 279k to fund our deposit for our next PPOR (which will be an IP until we move in there 2 or so years). We want to convert property A into an IP when we move to property B. I want to buy 50% of property A and increase the deducability against it.

Using s104B can someone explain how we do this? I spoke to my mortgage broker and she says I can't borrow money to buy 50% in my name only, that all loans against 1 property need to be in both names. Has anyone actually done this and can give some advice about it? Also with regards to the tax implications or links to a ruling?

Basically I want to borrow 400k, give it to my partner to pay off the 279k non deductable loan, and have a fully deductable loan against property A.

Cheers

You and your wife borrow jointly.

Your partner will still own the property so she wouldn't want to pay off her loan completely, but only the half relating to the half she is selling.

Paul and I have done this for clients previously.