Turning PPOR into IP

[tgg]

Initial loan on my PPOR was 400k. Over the years I have paid off 200k. I now want to turn this into an IP as I have just bought (settle in 2 months) a new property that I want to live in.

Can I refinance the loan on the existing property so that the loan is back up to 400k and use the funds as part payment on my new purchase which will be my PPOR? Will the refinanced loan be fully tax deductible as it is going to be an IP? If not, is there anything I can do to make the 400k loan tax deductible?

 

[Jess Peletier]

Sadly you can't.

B/c the new funds will be used toward your new PPOR, the interest won't be deductible. This is why we recommend not paying off loans, but rather using an offset account to put extra payments into.

If you are going to bring the old PPOR loan back up to $400k, make sure you split the loan to keep deductible and non-deductible loans separate.

 

[Jamie M]

Hi tgg

I started a thread on this recently - hopefully it provides some input http://somersoft.com/forums/showthread.php?t=105176

Cheers

Jamie

 

[Redom]

As others have said not much you can do here now - but over time as you grow your portfolio you can start employing a debt recycling strategy to assist in churning non deductible debt to deductible debt.

 

[Phiber]

Does this also applies to lump sum repayments made on the PPOR loan?

So let's say on the 400K loan, tgg has made a 100K lump sum repayment at some point, and would now like to extract that equity back out - the equity is available on the loan account and no technical refinancing is required (it can be extracted through netbank).

Would using the 100K for his next PPOR purchase make this portion not deductible when his current PPOR is moved to an IP?

If not, would extracting this equity somehow make the remaining 200K non deductible, or will the 200K remain deductible regardless?

 

[Redom]

Does this also applies to lump sum repayments made on the PPOR loan?

So let's say on the 400K loan, tgg has made a 100K lump sum repayment at some point, and would now like to extract that equity back out - the equity is available on the loan account and no technical refinancing is required (it can be extracted through netbank).

Would using the 100K for his next PPOR purchase make this portion not deductible when his current PPOR is moved to an IP?

If not, would extracting this equity somehow make the remaining 200K non deductible, or will the 200K remain deductible regardless?

Not an accountant, but pretty sure it won't be deductible. The purpose of the top up is for non deductible purposes. Whether it was paid down weekly or in a lump sump doesn't matter - unless i've missed some tax ruling that says otherwise.

 

[mugen]

My sister was bitten hard by this with ATO.

She did exactly same thing as OP BUT she was claiming deductions without being aware of contamination. In doing so, she was ordered to pay back amount deducted over years, a penalty and interest on the deducted amount.

I recently refinanced and have been taking steps to make sure I do not repeat the same costly mistake as my sister.

 

[Terry_w]

Initial loan on my PPOR was 400k. Over the years I have paid off 200k. I now want to turn this into an IP as I have just bought (settle in 2 months) a new property that I want to live in.

Can I refinance the loan on the existing property so that the loan is back up to 400k and use the funds as part payment on my new purchase which will be my PPOR? Will the refinanced loan be fully tax deductible as it is going to be an IP? If not, is there anything I can do to make the 400k loan tax deductible?

You are essentially asking can you borrow $200k for an private expense and claim the interest = No.

 

[Terry_w]

Does this also applies to lump sum repayments made on the PPOR loan?

So let's say on the 400K loan, tgg has made a 100K lump sum repayment at some point, and would now like to extract that equity back out - the equity is available on the loan account and no technical refinancing is required (it can be extracted through netbank).

Would using the 100K for his next PPOR purchase make this portion not deductible when his current PPOR is moved to an IP?

If not, would extracting this equity somehow make the remaining 200K non deductible, or will the 200K remain deductible regardless?

Any deposit into a loan is a repayment of that loan.

Any withdrawal is new borrowings.

 

[Phiber]

That clears it up, thanks Terry.
So in all situations, the 200k would remain deductible but not the 100k as considered new borrowing.

When we read about contamination, would there be a situation where by withdrawing the 100k, one would somehow make the 200k not deductible, or are the 200k always deductible, regardless?

If the 200k always remains deductible, then what exactly is contamination?

Thanks for the help guys, trying to get my head around that one.

 

[Perp]

When we read about contamination, would there be a situation where by withdrawing the 100k, one would somehow make the 200k not deductible, or are the 200k always deductible, regardless?

If the 200k always remains deductible, then what exactly is contamination?

If you redrew the $100K, the $300K loan is "contaminated" because it contains a mix of deductible ($200K) and non-deductible ($100K) debt. Property investors prefer to keep their deductible and non-deductible debt in separate loan accounts - this is said to be "uncontaminated"; it doesn't require any apportioning of interest and loan expenses between deductible and non-deductible purposes.

If you have a single $300K loan, you do have to apportion, because the loan's "contaminated".

In the OP's situation, even though the tax deductibility of the $200K repaid can't be restored - barring something as drastic as selling the property to a spouse or a related entity, that takes out a new loan for the higher amount - what most property investors would do, if they wanted $100K back for private purposes, would be to take out a second loan for that amount, rather than redraw and "contaminate" the original loan.

 

[Terry_w]

That clears it up, thanks Terry.
So in all situations, the 200k would remain deductible but not the 100k as considered new borrowing.

When we read about contamination, would there be a situation where by withdrawing the 100k, one would somehow make the 200k not deductible, or are the 200k always deductible, regardless?

If the 200k always remains deductible, then what exactly is contamination?

Thanks for the help guys, trying to get my head around that one.

The $200k will only be deductible if it is associated with the purchase of the property.

If you had a LOC type loan where you pay wages into it weekly (repayments) and withdraw money for groceries weekly (new loans) then perhaps none of the interest would be associated with the property and therefore no deductions.

Or another situation more easily fallen into, you paid the loan down to $150,000 at one stage and then used redraw to buy a car.