Upgrading property

From: Jay Hunter


I'm sure many people have come across this problem before:

I buy my first property (A) as a place of residence (1 bed unit and live in it) and say its worth 300K. I then buy an IP (property B) for say 250K and borrow the full amount (using equity in my residence for the deposit.). Now assuming I have paid of all my debt on my home (A) but find I now want a bigger place and want to buy property (C) as a place to live (worth say 600K for example).

Question 1: can the 300K equity in (A) become equity in (C). therefore, I have a loan on my residence of 300K and a tax effective loan on (A) of 300K?

another way to ask the same thing: Do I have to sell (A) to get the equity out and be able to use that in (C)... and buy another IP being (IP D) ? (I know there will cap gain but disregard this for a moment)... for all the selling expense etc... if I have to do this would I be better or doing question 2 ?

Question 2: Would I be best to simply borrow a bit more and buy a place of residence that is going to last me longer (i.e. 2 bed instead of 1 bed) ?

sorry for the long note. any help would really help this confused head of mine :)

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Reply: 1
From: Rolf Latham

Hi Jay

This is one of te most common problems.

Simply on basis of tax compliance, it is the purpose of the loan that determines the tax deductability.

Therefore, this can not work unless you sell the first property or swap titles etc.

Perhaps one of the structure gurus pculd be help you here.

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Reply: 1.1
From: Paul Zagoridis

hmmmm... Picking up Rolf's gauntlet.

I could and would structure it so that I keep all 3 (or 4) properties and got a tax deduction on the interest for $300K secured by IP A.

Many accountants and most tax-payers would NOT like the answer nor the long-term complexity.

But at this point in time, Jay, have you bought A and B? If not then don't worry about how to finance C. Tax laws can and will change by then, so never do anything purely for the tax consequences.

Unless buying a 2 bedroom place (option 2) makes financial and investment sense today, then don't do it.


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