Using IP equity to buy a first home?

[bettedavis]

I know the title sounds odd.
My bf has a property where we have been living for 7 years.

I recently signed a contract to buy my first home, which my bf will move in together and we will rent out the old home.

Since I need to borrow only about 40% of the purchase price, we are considering to increase my bf's loan amount to finance the new home, rather than setting up a separate loan, so that we can also get the full tax deduction for interest payment since my bf's property will now be an IP.

I am just wondering, will this work and even be possible?

Thanks in advance.

 

[hysterical]

I know the title sounds odd.
My bf has a property where we have been living for 7 years.

I recently signed a contract to buy my first home, which my bf will move in together and we will rent out the old home.

Since I need to borrow only about 40% of the purchase price, we are considering to increase my bf's loan amount to finance the new home, rather than setting up a separate loan, so that we can also get the full tax deduction for interest payment since my bf's property will now be an IP.

I am just wondering, will this work and even be possible?

Thanks in advance.

The money was borrowed against ur bf's property which will become an IP but is use to buy a PPOR, hence interest on the money used for the PPOR purchase is not tax deductible.

The tax deductible test is on the usage of the money, not on the security by which the borrowing was obtained.

Cheers

 

[Peter_Tersteeg]

Your bf's existing loan will become tax deductable - I doubt anyone will dispute that. Generally speaking if he borrows money for a house he'll live in (your new purchase), it won't be tax deductable, so in essence you can't do what you're proposing.

Here's an idea (a bit radical, but worth putting to an accountant):

Your bf could take a second loan against his property. He could then lend the money to you, who pays him back at the same interest rate + a premium (say an additional 1%).

If you pay your bf over and above what he's paying, and if he declares and pays tax on the 1% (his profit), there's an argument that he could claim the money he's borrowed to lend to you as a deduction, because he's making a profit.

You could then charge him rent (which technically you should pay tax on, but you can offset this with some deductions as well).

Doing all this would make it look like a commercial arrangement so you might be able to get away with it. Did I mention it's a bit out there and you should consult an accountant?

The downfall is, if you do everything you'd likely have to do to justify it to the ATO, you're actually going to be in a worse of position from a cashflow perspective. You're better off to just borrow the money in a regular manner.



For what it's worth, you might want to consider taking an 80% loan against the new purchase and putting the extra cash into an offset account. Essentially set it up as if it lookes like an investment loan. This would make it more tax effective if you ever decide to turn the new purchase into an IP.

 

[Rolf Latham]

For what it's worth, you might want to consider taking an 80% loan against the new purchase and putting the extra cash into an offset account. Essentially set it up as if it lookes like an investment loan. This would make it more tax effective if you ever decide to turn the new purchase into an IP.

Sage advice from Mr Sage

ta
rolf

 

[matto_]

everything comes back to maximising the offset

 

[Aaron_C]

Maximising the offset is prudent but it's not the be-all-and-end-all. Tapping equity is the other side of that equation.

 

[bettedavis]

Your bf's existing loan will become tax deductable - I doubt anyone will dispute that. Generally speaking if he borrows money for a house he'll live in (your new purchase), it won't be tax deductable, so in essence you can't do what you're proposing.

Here's an idea (a bit radical, but worth putting to an accountant):

Your bf could take a second loan against his property. He could then lend the money to you, who pays him back at the same interest rate + a premium (say an additional 1%).

If you pay your bf over and above what he's paying, and if he declares and pays tax on the 1% (his profit), there's an argument that he could claim the money he's borrowed to lend to you as a deduction, because he's making a profit.

You could then charge him rent (which technically you should pay tax on, but you can offset this with some deductions as well).

Doing all this would make it look like a commercial arrangement so you might be able to get away with it. Did I mention it's a bit out there and you should consult an accountant?

The downfall is, if you do everything you'd likely have to do to justify it to the ATO, you're actually going to be in a worse of position from a cashflow perspective. You're better off to just borrow the money in a regular manner.



For what it's worth, you might want to consider taking an 80% loan against the new purchase and putting the extra cash into an offset account. Essentially set it up as if it lookes like an investment loan. This would make it more tax effective if you ever decide to turn the new purchase into an IP.

Excuse my ignorance but if my bf will pay tax on the intrest income he gets from me, then the net tax effect will be nil even after he claims deduction on the interest payment to bank? (both at marginal rate?)

I try to find a solution but it seems that there is no way we can use the loan he already paid to maximise tax deduction unless we use it to buy another IP, which we cannot afford at the moment considering our cashflow....

Would it be still worth to refinance it to have an offset and as IO?

 

[Rolf Latham]

Would it be still worth to refinance it to have an offset and as IO?

IO for sure

yep, as buffer money for future investment yes.

there are "slow" ways you can claw some of this back.

Speak with a savvy accountant or experienced broker

ta
rolf

 

[Aaron_C]

You better get the structure right otherwise you are going to have difficulties later on despite following the general advice or 'wisdom' of paying down your house asap.

 

[kum yin lau]

Hi there, isn't the 'obvious' answer to use the new purchase as an IP? If your new purchase is a fairly new building, you get a fair amount of deductions on it.

Leverage bf's property to borrow max 105% + rolling on IP costs to collect the most amount that you can then pay off the existing loan on PPOR. When it's paid off, you can then sell it & start again, this time with more detailed planning.

All the other ifs and buts cost more than they're worth, I think.

KY