Transferring PPOR Equity?

[arg821]

Hi all,

How would I go about moving PPOR and keeping it legal tax wise?
We own our PPOR outright but may need to look to purchasing a new PPOR and renting our old house out.
Our house is worth about $250K, and I have savings of $90K.

See normally what I would want to do, is buy a new PPOR, and take out 80% of the equity in our old PPOR and transfer the money into our new one. This way our new PPOR would be either fully owned or close to it, and there would be only 20% equity in the newly created IP.

I have been told this is not possible, as the ATO would not be happy? My question is, why should the ATO care - I'm the one who has paid tax on all that income to pay it off, now I just want to transfer that hard work into a new place, and keep the old one as a rental??

Can anyone advise on how this can be achieved or would I have to sell our old home? (Well I see little point in having a fully paid IP and only 20-30% equity in a nice new PPOR).

Thanks,
Andrew.

 

[duncan_m]

I swear this question gets asked 20-30 times a year here We need a FAQ post for it..

A few options are available to you..

1. Buy your half of the PPOR from your wife.. She'll get a fist full of dollars to put into the new PPOR and you'll have a fist full of debt to offset the rental income... in SA this transaction will be free of stamp duty.

2. Sell the entire house to a Family Trust you create.. alas it'll be the only asset in the trust initially and the loss it'll make will have to be carried forward to offset against future profits.. or consult an expert and create a Hybrid Discretionary trust that will still allow you to deduct the interest personally...

3. Just sell the house and buy your new PPOR with the proceeds, and an IP with the smallest deposit you can get away with.. alas you'll pay stamp duty on the purchase of the new IP

4. Grin and bear it, lay back and think of England whilst you pay the income tax on your newly created IP thats hugely positively geared..

 

[Simon]

Hi all,

How would I go about moving PPOR and keeping it legal tax wise?
We own our PPOR outright but may need to look to purchasing a new PPOR and renting our old house out.
Our house is worth about $250K, and I have savings of $90K.

See normally what I would want to do, is buy a new PPOR, and take out 80% of the equity in our old PPOR and transfer the money into our new one. This way our new PPOR would be either fully owned or close to it, and there would be only 20% equity in the newly created IP.

I have been told this is not possible, as the ATO would not be happy? My question is, why should the ATO care - I'm the one who has paid tax on all that income to pay it off, now I just want to transfer that hard work into a new place, and keep the old one as a rental??

Can anyone advise on how this can be achieved or would I have to sell our old home? (Well I see little point in having a fully paid IP and only 20-30% equity in a nice new PPOR).

Thanks,
Andrew.

Andrew,

Let me offer you some advice. Firstly, don't fight the unfairness of the ATO. It is futile and leads you on the path to madness.

The ATO sees drawing of equity as a new loan - even redrawing on principal paid down. So if you drew the equity in a property to buy a new home then that loan is a personal loan and not deductible.

There are ways around this but none come cheap.

The easiest is to sell the property. To a stranger if need be. This will cost you an Agents fees but you now have the equity released to buy a home.

You can sell it to a spouse or to a trust of some description. You will save the agents fees but will pay stamp duty on the transfer of ownership. The buyer can borrow 105% of the "valuation" which should cover all costs. This gives you as large a possible deductible debt against the now IP and a lump sum to buy the new home with.

Whatever you choose to do have a think about what the future holds for this new home. To avoid this situation again I would suggest you consider an IO loan on the new home for as much as you can borrow. 80% or higher if you choose. Use an offset account to store all repayments of principal in - this has the same effect as a P&I loan but with one huge advantage.

The ATO doesn't see money in an offset account as having paid down a loan. So if you buy a third home you can draw everything from this offset account and you have the original loan preserved and able to be tax deducted! Of course if inflation sees you with significant capital growth then you cannot freely draw that bit out .....

Anyone buying a home which may not be for the long term should consider this strategy. Young couples buying their starter home who know, that come kids, that they will want a larger place should consider this.

I hope this makes sense.

Cheers,

 

[Les]

G'day Agleave,

How would I go about moving PPOR and keeping it legal tax wise?
We own our PPOR outright but may need to look to purchasing a new PPOR and renting our old house out.
Our house is worth about $250K, and I have savings of $90K.

That bolded bit appears to be your un-doing, Agleave. It is SO common that most people expect to be able to do this. But that is not the way things are set up by law. And THIS is the very issue that led to my personal BFO (Blinding Flash of the Obvious) so many years back.

For more, check this out:-
http://www.somersoft.com/forums/showpost.php?p=43664&postcount=1
Note:- Be sure to click on "Thread: keeping your former house as an IP" in the top right corner. This leads to some insightful comments from many respected people. And, in post #7, the link leads to the original BFO thread (for interest). It IS a common problem, but answers are available. Also, NOTE THE DATE of the posts on the link above - it goes back 3 to 6 years !!!


In short, you CAN do this (as your words seem to indicate), but you'd be left with paying Tax on any rental Income from the old PPOR (as you would have NO mortgage Interest that could legally be claimed against the "new IP" - i.e. your OLD PPOR). You may be able to claim Depreciation to offset the Income - but the Mortgage Interest is UNABLE to be claimed (as I understand it) against the Income - mainly because you don't HAVE a Mortgage on the old PPOR. And if you invent one (to purchase the NEW PPOR) then it is all NON-deductible !!!

It took me a while to get my head around - but this is the way things are in Australia at the moment. Will it change? Hell, I dunno! But the link should help to understand why SO MANY people say "Sell your old IP, and use the profits to buy your new one".

I think Jan is included - I'll see if I can find her quote too - wait a bit.... Here it is (from the FAQ section of somersoft.com.au)

We own our own house but want to borrow money against this house to build a bigger and better house in which to live. We would still like to keep the one we're living in now as a rental property. Is the loan tax deductible?
The short answer is no, the loan is not tax deductible. This is a classic situation in which many property owners find themselves when they first decide to upgrade. Assessing whether interest on a loan is tax deductible depends on the purpose of the loan – not the collateral for the loan. In this case, the purpose of the loan is clearly to build a new home and not for the purpose of producing income. This situation is a double loss. Not only would the interest on the loan not be tax-deductible, but the rent from the investment property would be taxed at the highest marginal tax rate.

A simple solution could be to sell the first home and put the proceeds into the new home; you would then borrow to buy a rental property, using the equity in the new home as collateral. The interest on the loan would then be tax-deductible and instead of paying tax, a tax refund would more likely result.

However, there may be alternatives. For example, if the first home had been bought in the wife's name only, the husband could borrow the money to buy the property from his wife, and she could put the money she receives towards the new house. A legally binding contract is needed, and stamp duty must be paid, however, the tax benefits may far outweigh the transfer costs. I would recommend that you check with both your solicitor and accountant before you attempt any transaction of this nature.

I think this is one of the major reasons that Rolf often says "Use an Offset Account" rather than "paying down" a mortgage. It prevents this very situation from hurting you, while still giving you the benefit AS IF the mortgage was paid down/out. A bit late for you now, Agleave - but some thoughts from that earlier link might be useful.

As I understand it, with NO mortgage owing on the old PPOR, you'd be left with a choice between:-
1. Sell, and use the proceeds to buy your next PPOR (and then borrow AGAINST the new PPOR for another IP if you wish). At least there is NO CG Tax to pay when you sell....
2. Don't sell, but be prepared to pay more Tax on your extra Income from your "new IP" (i.e. your old PPOR) as ALL of your borrowings are for "your new PPOR" - i.e. NOT Tax deductible.
3. SEVERAL people suggest "other ways" in the link above - and, of course, Jan's own words. Have a look and see what may suit you.

No doubt there are MANY others on the forum that can offer suggestions. Let's see what they come up with,

Regards,

PS Usual disclaimer applies (i.e. I am NOT an adviser, thus above is my opinion only)

 

[arg821]

To Les, Simon, and Duncan M,

Thanks for your responses, and for the links provided. It does indeed look like I'll need to sell - which I guess is not a massive problem, its just that the property is 7ks from the CBD and a new development is being built around us which is great for the median of the suburb. I own another property two streets over for the same reason, but this one is an IP of course.

I agree fully with the idea of next time getting an offset account setup and parking all cash in there, enough to cover the loan at least. This way I can later convert the PPOR to an IP and not worry about tax issues.

One further question I would then have - if you had a loan of say 300K and you also had 300K in an offset to effectively wipe the loan out, would it make it easier/harder/no difference to borrow further money? (As opposed to not having the loan at all, but not having access to the cash either). ??

Thanks,
Andrew.

 

[duncan_m]

It does indeed look like I'll need to sell - which I guess is not a massive problem, its just that the property is 7ks from the CBD and a new development is being built around us which is great for the median of the suburb.

How did you reach that conclusion?

I've know of 4 couples in SA who have done the "buy wife's half of PPOR" just before they they move from the PPOR to a new one.. it worked well in each example.. the property was about cashflow neutral in each case..

Another $300K IP will cost you $11,300 in Stamp Duty, to sell your existing PPOR will cost you around $8000 in Agents commissions and advertising, you'll have to clean it up, repaint maybe? and go through all the hassle of open inspections..

If, between your wife and yourself you agree thats its value is in the top end of the believable range.. say $280K and you buy your wifes half of the existing PPOR then YOU will have a debt of $140K and your wife will have $140K in cash to put into your new IP (+ the $90k cash you have)..

Assuming that the house rents for $260pw then you'll have $13,520 of income from the property, and costs of $10,500 (interest) then rates, insurance, maintenance approx $3500.. in essence cashflow neutral (and probably cashflow negative with non-cash deductions etc)..

Your new house will have a big debt but with up to $240K cash sitting in an offset account..

You're obviously confident about the potential capital gain of your existing house.. hang onto it!

 

[duncan_m]

One further question I would then have - if you had a loan of say 300K and you also had 300K in an offset to effectively wipe the loan out, would it make it easier/harder/no difference to borrow further money? (As opposed to not having the loan at all, but not having access to the cash either). ??

An offset account isnt like a term deposit.. you can access it at any time and use it for your deposits on new houses..