Want To Upgrade To Another Ppor, But Don't Want To Sell Existing Ppor - What To Do??

[Watermelon Man]

Hello,

I own a 2 bedroom unit (PPOR) with only $10,000 debt left on a $150,000 loan. I want to buy a $300,000 PPOR, but don't want to sell my existing PPOR as it would make a great IP.

As any PPOR is not tax-deductible, I'm thinking of redrawing $140,000 ($150,000 loan - $10,000 left) & using that money towards the purchase of the new PPOR at $300,000; therefore only leaving a debt of $160,000. As a result, my existing PPOR would become an IP & therefore be tax-deductible & over 7-10 years or so it would double in value & pay itself off.

What do you think of this plan??

 

[Rickardo]

Hi Watermelon Man,

The purchase of this $140,000 redraw will be used to pay for your PPOR, therefore the interest will not be deductible - as it is for private and not investment purposes.

Hello,

I own a 2 bedroom unit (PPOR) with only $10,000 debt left on a $150,000 loan. I want to buy a $300,000 PPOR, but don't want to sell my existing PPOR as it would make a great IP.

As any PPOR is not tax-deductible, I'm thinking of redrawing $140,000 ($150,000 loan - $10,000 left) & using that money towards the purchase of the new PPOR at $300,000; therefore only leaving a debt of $160,000. As a result, my existing PPOR would become an IP & therefore be tax-deductible & over 7-10 years or so it would double in value & pay itself off.

What do you think of this plan??

 

[Mr. Fabulous]

What do you think of this plan??

I think you need to brush up on your tax law. That $140,000 is not deductible. The ATO will look at the purpose of the loan, not where the money comes from. If you draw down that money to buy a new PPOR it's non-deductible, because you used it to buy a PPOR.

My suggestion to you is to sit tight where you are, buy some I.P.'s then buy a bigger PPOR further down the track or buy the 300K place, rent it out for a few years, pay it down as quickly as possible then move in later when the debt is much smaller.

Mark

 

[The Y-man]

What do you think of this plan??

As the others have said, you'd need an intermediate step.

i.e.
1. buy new PPOR
2. redraw the $140k from old PPOR
3. place $140k in a CF+ investment (performing better than your interest rate)
4. use the CF from your investment to pay interest (and hopefully some principal) on new PPOR

Cheers,

The Y-man

 

[lizzie]

great idea y-man. can you also divert all the rent from the ip to the ppor payments?

 

[tubs]

Unless you 'sell' your current PPOR to a trust. Then that loan would be deductible to the trust. So, if your apartment is worth $200k, your trust borrows $200k from the bank, buys the place, the bank pays you back $200k which you can use to buy your new PPOR.

Maybe I'm not 100% on the details, but it would be something like I've described. You'd have to pay stamp duty on the transfer.

 

[The Y-man]

can you also divert all the rent from the ip to the ppor payments?

Absolutely - it is taxable income.

Cheers,

The Y-man

 

[Kennethkohsg]

Hiya Watermelon,

1. I think that you may be able to get around the issue of tax deduction on the interest payments by continuing to "nominate" the old PPOR house as your PPOR again and then, making the new your house as your "investment property" instead, such as like renting out the house back to your business as a office space/premise etc, to become some sort of "income-producing asset" officially so that your interest payments on your loan on the second property purchase, can become tax-deductible too.

2. If you want to physically stay in this new house long term and never sell, then you may want to also consider purchasing the new house under some sort of a Family Trust structure and then "renting" back from the Trust to live there long term as its "tenant".

3. Alternatively, I believe that ATO does also allow you to have the first house treated as a PPOR within a 6 years period after you have relocated to other States/somewhere to live in subsequently, once you have initially lived in in the first house as a PPOR, which you have done so in the present context, isn't it?

4. So what exactly do you intend to do with your present PPOR and the new house to be purchased?

5. For me, the "intermediate step" idea as suggested by Y-Man, is indeed a good and viable alternative for you to seriously consider too.

6. Looking forward to learning from you, please.

7. Thank you.


regards,
Kenneth KOH

 

[Watermelon Man]

Hmmm...interesting ideas, however...

In relation to Y-Man, based on your theory (& I appreciate your input), I have to buy 2 NEW properties (the new PPOR + another IP to put the $140k redraw from my existing PPOR) - quite frankly I don't my finances could handle buying 2 properties at once.

The problem I see (& I might be naive saying this) with Y-Man's post above is that:

I have debt of $140,000 on my existing PPOR (after redraw) + new debt of $300,000 on new PPOR + approx. $60,000 new debt on new IP purchase/loan (assuming new IP purchase was approx. $200,000 & therefore more than $140,000). Therefore total debt is $500,000.

To Kenneth, my plan was to rent out my existing PPOR & move into the new PPOR.

Basically I think the only way around this is either:

1) SELL & use money from sale to fund new PPOR (ie: $300k new PPOR less $200k sale outright from existing PPOR = $100k loan)

or

2) Pay off loan completely on existing PPOR & then use net rental income of approx. $9,000 p.a. + existing savings to pay off loan of $300,000 on new PPOR.

Personally I rather opt for the 2nd option.

 

[The Y-man]

Hmmm...interesting ideas, however...

In relation to Y-Man, based on your theory (& I appreciate your input), I have to buy 2 NEW properties (the new PPOR + another IP to put the $140k redraw from my existing PPOR) - quite frankly I don't my finances could handle buying 2 properties at once.

The problem I see (& I might be naive saying this) with Y-Man's post above is that:

I have debt of $140,000 on my existing PPOR (after redraw) + new debt of $300,000 on new PPOR + approx. $60,000 new debt on new IP purchase/loan (assuming new IP purchase was approx. $200,000 & therefore more than $140,000). Therefore total debt is $500,000.

Didn't say it had to be a residential ip or even an ip at all I just said a CF+ investment. i.e. could be a commercial property, CPT, income funds, etc.

Cheers,

The Y-man

 

[Watermelon Man]

In any event you're still going to have more debt because you're having to buy 2 x something - a PPOR + a CF+ investment which obviously consists of money!! so you're borrowing more & more money to the tune of at least $440,000 + whereas sure the new PPOR isn't tax deductible but you're only borrowing $300,000!! $300k vs $440k?

 

[Watermelon Man]

And I didn't say it was residential either so there

 

[Les]

I think this is where the "Good Debt vs Bad Debt" scenario raises itself once more.

In any event you're still going to have more debt because you're having to buy 2 x something

Regards,

 

[Watermelon Man]

Yes Les I can appreciate the good debt vs bad debt argument, but $300,000 is really not a lot of money considering PPOR prices today (I mean in Melbourne or Sydney I'm sure a lot of investors are carrying a $300,000 debt on their $500-$600,000 PPOR or more???).

At the end of the day, everyone has to buy a PPOR at some point (I mean you obviously can't change things when you're renting - I know - I've been there), so given this is the case...I think logically the only way to get ahead with your PPOR (meaning not carrying a lot of non-tax-deductible debt) is to sell your PPOR each time & then upgrade in price, etc (see Kenneth Koh's great post). Hmmm...I guess that's what I'll have to do!!

 

[alexlee]

At the end of the day, everyone has to buy a PPOR at some point (I mean you obviously can't change things when you're renting - I know - I've been there), so given this is the case...I think logically the only way to get ahead with your PPOR (meaning not carrying a lot of non-tax-deductible debt) is to sell your PPOR each time & then upgrade in price, etc (see Kenneth Koh's great post). Hmmm...I guess that's what I'll have to do!!

I still don't see why you can't just keep saving money, putting it into the ppor loan and then redrawing to buy IPs? That would convert the loan into deductible loans (slowly).

It's best to delay the PPOR as much as possible. I'll be buying one next year and having a lot of debt on it, but I have enough IPs to at least fund some new purchases. I know the PPOR loan isn't the most efficient, but at least I'll have SOME of both worlds.
Alex

 

[The Y-man]

In any event you're still going to have more debt....

One of my major objectives in life is to die in as much debt as possible.

Cheers,

The Y-man

 

[Andrew_A]

One of my major objectives in life is to die in as much debt as possible.

Cheers,

The Y-man

Simply offer to take on the US debt then, win-win.

 

[Body-By-Jake]

One of my major objectives in life is to die in as much debt as possible.

Cheers,

The Y-man

That seems a bit sadistic!!

 

[Mr. Fabulous]

At the end of the day, everyone has to buy a PPOR at some point (I mean you obviously can't change things when you're renting - I know - I've been there), so given this is the case...I think logically the only way to get ahead with your PPOR (meaning not carrying a lot of non-tax-deductible debt) is to sell your PPOR each time & then upgrade in price, etc (see Kenneth Koh's great post). Hmmm...I guess that's what I'll have to do!!

This statement, to me this is a classic example of someone not understanding how debt works and how to use it to their advantage.

Mark

 

[Watermelon Man]

My suggestion to you is to sit tight where you are, buy some I.P.'s then buy a bigger PPOR further down the track or buy the 300K place, rent it out for a few years, pay it down as quickly as possible then move in later when the debt is much smaller.

Mark

What if I don't want to wait a few years, what if I want to buy something NOW; which is what I originally wanted answers to my question. Anyway, this quote from you of "classic example of someone not understanding how debt works and how to use it to their advantage" - well, it doesn't answer my original question. If I wanted to wait, I would wait, but I don't want to.