The plan and the loan/structure to do it

[Pete_d]

Hi guys,

I'm new-ish to this property game but have learnt a lot from this forum, great stuff. Interested in your suggestions in this situation.

First the plan....

1. Now - Approx. $275K savings, no debt, no IP's, no PPOR.
2. Purchase PPOR (House 1) for $350-400K
3. Use approximately $50-80K as deposit and get $300K IO loan
4. Put rest of savings in offset account $200K, effective leverage approx. 23%
5. Live in House 1 (PPOR) for 1-2 years until nealy paided off (equity $100K, savings in offset account $300K, minimal debt)
6. Purchase IP (House 2) with minimum deposit drawn from PPOR offset account, and obtain a loan as big as banks will give me.
7. Live in House 1 for 2-3 year enjoying tax benefits of deductible debt on large loan.
8. Move into House 2 withdraw as much equity from house 1 and put towards House 2. House 1 become IP and House 2 becomes PPOR.

I'm looking to purchase house 1 (step 2) in the coming months, does anyone have any thoughts about the loan provider that will provide what i need.
-IO loan on PPOR
-Offset account with no maximum in account
-Potentially a loan including offset account less than $100K

Also happy to get peoples thoughts on the plan? Should I be thinking about a tax effective structure or just general thoughts on the plan. I figure now is a good time to try and keep minimal leverage as captial growth in Melbourne is likely to be slow, then gear up in a few years when the upswing comes around again.

 

[alexlee]

6. Purchase IP (House 2) with minimum deposit drawn from PPOR offset account, and obtain a loan as big as banks will give me.

Just be careful with this bit. If you draw money from an offset to use as a deposit on an IP, it might not be deductible.
Alex

 

[Pete_d]

Just be careful with this bit. If you draw money from an offset to use as a deposit on an IP, it might not be deductible.
Alex

Why is that? Is that related to the Tax Act - Part 4A - Tax avoidance rule for income tax.

I'm very much still learning, and trying to get it right before I take the big step

 

[steveadl]

How long between steps 5 & 6? With that amount of savings, I would be getting both properties as soon as possible to let them start growing for you. Even if that means having a bit more non-deductible debt than otherwise, it's a trade off I'd be willing to make. Hell, even look into getting a 3rd IP if it's plausible.

Otherwise sounds ok, but once you get to steps 7 & 8, make sure you know what you're doing and that it's all kosher with the ATO. You don't want mixing of deductible and non-deductible debt that will come back to haunt you. Speak to a good accountant.

 

[jaycee]

Interesting to know this answer, I didn’t think of that, I was thinking "It's not the source of the funds, it’s the purpose of the funds which make it eligible or not for deduction"

 

[alexlee]

Why is that? Is that related to the Tax Act - Part 4A - Tax avoidance rule for income tax.

I'm very much still learning, and trying to get it right before I take the big step

Interesting to know this answer, I didn’t think of that, I was thinking "It's not the source of the funds, it’s the purpose of the funds which make it eligible or not for deduction"

The added quirk here is the purpose to which the BORROWED funds is used makes it eligible. So your PPOR loan is obviously not deductible. Putting money into the offset decreases the PPOR interest payable. Now, the offset is NOT a new borrowing, so it doesn't matter what use you put it to. However, using the offset balance to buy an IP means you're not borrowing more: you're just using money in an existing account. The result is that your offset balance goes down, so you pay more interest against the PPOR loan. In this case, I would say the interest on the amount taken from the offset is NOT deductible because the PURPOSE of the loan (not the offset) is still for the PPOR.

Pretty much the same idea why using offset amounts to buy a PPOR preserves the deductibility of the original loan. Here it works in reverse, I think.
Alex

 

[marg4000]

8. Move into House 2 withdraw as much equity from house 1 and put towards House 2. House 1 become IP and House 2 becomes PPOR.

As House 2 is now your PPOR, the equity you withdraw will be for private purposes and therefore not tax deductible.
Marg

 

[alexlee]

Pete, have you thought about just keeping it simple? i.e. keep the PPOR and IPs totally separate? That way you're not limited to only buying properties you would want to live in. You don't have a PPOR yet, and yields are still relatively low. How about just continuing to rent (or whatever your situation is) and buy IPs and keep them only as IPs?

Moving in and out of IPs just make things very messy.
Alex

 

[jaycee]

The added quirk here is the purpose to which the BORROWED funds is used makes it eligible. So your PPOR loan is obviously not deductible. Putting money into the offset decreases the PPOR interest payable. Now, the offset is NOT a new borrowing, so it doesn't matter what use you put it to. However, using the offset balance to buy an IP means you're not borrowing more: you're just using money in an existing account. The result is that your offset balance goes down, so you pay more interest against the PPOR loan. In this case, I would say the interest on the amount taken from the offset is NOT deductible because the PURPOSE of the loan (not the offset) is still for the PPOR.

Pretty much the same idea why using offset amounts to buy a PPOR preserves the deductibility of the original loan. Here it works in reverse, I think.
Alex

Aha gotcha
Now to get into a financial posiiotni where I have $200k cash to be able to apply this knowledge....

 

[Pete_d]

8. Move into House 2 withdraw as much equity from house 1 and put towards House 2. House 1 become IP and House 2 becomes PPOR.

As House 2 is now your PPOR, the equity you withdraw will be for private purposes and therefore not tax deductible.
Marg

But the loan on house 1 will now become tax deductible and the loan on house 2 will not. Am I correct? Therefore maximising my deductible debt and reducing the non-deductible.

 

[alexlee]

But the loan on house 1 will now become tax deductible and the loan on house 2 will not. Am I correct? Therefore maximising my deductible debt and reducing the non-deductible.

The amount you draw out of property 1 to put into property two will NOT be deductible as property 2 then becomes your PPOR. Since the purpose of the redraw is to put into property 2, it's not deductible.

It's about use of funds.
Alex