Keeping our home as an investment and buying a new home

LEuphemistic on 18/08/2014 - 13:38

Things are changing and we are thinking about a new, bigger home for the growing family. We are lucky enough to have sold an investment property last year and now our home is completely debt fee. Originally we had thought of waiting for a few more years before moving, but have now brought that idea forward.

Question: is it possible to keep our current home as an investment and borrow against it for the tax advantages, thus reducing our new home loan? or is it better to sell our current home, pocket the tax free capital gains and purchase?

Thanks

Financial

Comments

  • Daabido on 18/08/2014 - 14:02
    +2

    No, you can't take a debt free home, refinance it to purchase a new property and use the interest payments on your old home as a deduction to your income.

    • Boshait on 18/08/2014 - 14:45
      +4

      No, you can't take a debt free home, refinance it to purchase a new property and use the interest payments on your old home as a deduction to your income.

      It is the purpose of the loan not the security that determines deductibility.

      • Daabido on 18/08/2014 - 14:53
        -1

        Wrong.

        https://www.ato.gov.au/General/Property/In-detail/Rental-pro…

        "What can you claim?
        You can claim the interest charged on the loan you used to:
        purchase a rental property
        purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
        make repairs to the rental property (for example, roof repairs due to storm damage)
        finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)
        purchase land on which to build a rental property.
        You can also claim interest you have pre-paid up to 12 months in advance.

        What are you unable to claim?
        You cannot claim interest:
        you incur after you start using the rental property for private purposes
        on the portion of the loan you use for private purposes (for example, money you use to purchase a new car or invest in a super fund)
        on a loan you used to buy a new home if you do not use the new home to produce income."

        • Smulder on 18/08/2014 - 14:58
          +2

          Actually he is correct.

          Not only that, the ATO webpage that you have linked to confirms that he is correct.

          Lastly, I believe he was agreeing with you.

        • Boshait on 18/08/2014 - 15:00

          Wrong…
          You can claim the interest charged on the loan you used to:purchase a rental property…
          You cannot claim interest:on a loan you used to buy a new home if you do not use the new home to produce income.

          You just agreed with me. Sorry if my previous version created the impression I was disagreeing with you. It took some rereading to interpret what you posted.

        • Daabido on 18/08/2014 - 15:01

          @Smulder: Yes, I realise that now. It is the purpose of the loan, which in the case of refinancing just to get an interest deduction which would not be allowable. Sorry about that Boshalt!

  • coolhead on 18/08/2014 - 14:08
    -2

    If the capital gain is significant you myt want to sell it and save on the tax factor.. although i do understand the hassle of selling & buying another one but that will/may save you a significant amount…

    re your question although i am not a legal advisor but i believe that can be done.. the moment you have tenants in your existing house, the interest component on any repayments is tax deductible…

  • donga100 on 18/08/2014 - 14:17
    +1

    First of all, I recommend speaking to your accountant.

    Secondly, you can pocket the tax free capital gains by getting a valuation done on your home before it becomes an investment property. You then only pay tax on the cpital gains it made while it was an investment property. Make sure you use a valuer who specialises in this type of thing rather than a bank valuation as your bank will generally undervalue your property in order to risk lending too much against it.

  • frysie on 18/08/2014 - 14:22

    Is it possible to sell it, buy your new house as your new PPOR (no CGT ? …ask an accountant), put the whole amount sold on the house you have into an offset account (interest only), then use that money as equity for another property? then buy another house

  • Euphemistic on 18/08/2014 - 14:43

    Not really concerned reducing CGT, more keeping the house as an investment and claiming expenses on it, like interest. So far I have conflicting stories wether I can take out a loan on the current house that will then become an investment property, but leaning towards being not able to.

    If our current house becomes rental will definitely get a valuation at the time of renting. It's a good house, and I believe would make a good rental which is why I'd rather keep it and not worry about purchasing another investment property with all the unknowns about it.

    Edit: will be consulting professionals before going thorough with it, just throwing it out there in the initial phase.

  • Smulder on 18/08/2014 - 14:48
    +5

    The ATO will look at what the borrowed funds were used for to determine interest deductibility.

    If you take out a loan and use the funds to buy a new property that becomes your permanent place of residence then the interest will not be deductible, regardless if an investment property is used as security.

    In fact, the ATO website has an example that exactly describes your situation:

    "Example: Interest incurred on a mortgage for a new home

    Zac and Lucy take out a $400,000 loan secured against their existing property to purchase a new home on the other side of town.

    Rather than sell their previous home they decide to rent it out.

    They have a mortgage of $25,000 remaining on their existing home which is added to the $400,000 loan under a loan facility with sub-accounts - that is, the two loans are managed separately but are secured by the one property.

    Zac and Lucy can claim an interest deduction against the $25,000 loan for their previous home, as it is now rented out.

    They cannot claim an interest deduction against the $400,000 loan used to purchase their new home as it is not being used to produce income even though the loan is secured against their rental property."

  • Euphemistic on 18/08/2014 - 15:28

    That makes it clear. Sounds like we'd be better to buy an investment property with a loan, then sell here and buy a new home with the funds and a smaller loan. Having a debt free home isn't such a great thing after all!

    • Boshait on 18/08/2014 - 17:11
      +1

      No, it's a good thing to have your PPOR debt free. Then you can borrow against it for a deductible purpose such as buying a rental or share investing. It's borrowing for non-deductible purposes that is the problem.

    • mrmachine on 19/08/2014 - 09:22

      I'm not sure sure it would be a good idea to sell and buy an investment property. You'll have to pay stamp duty again, which you will have to recoup over time with the tax deductions before you start to break even.

      Say you sell and buy a new place for 500k and have to pay 20k stamp duty. Say your rental income from the new property is 25k per annum Your savings might be 25% (your tax rate) of 25k per annum, which is 6.25k.

      So it would be at least 3 years until you start seeing any benefit from the new investment property, all for the sake of lining the government's pockets with another 20k stamp duty because a property changed hands.

      EDIT: My calculation is all wrong. You would be claiming deductions on the repayments, less any rental income. Not on the rental income itself, as I have above. Still, work it out and see how long it will take to recoup the loss from stamp duty.

      • Euphemistic on 19/08/2014 - 09:40

        Good point re the stamp duty. Time for some professional analysis. Problem with that is I don't have an accountant so will need to find someone I can trust.

  • SaberX on 19/08/2014 - 00:35
    +1

    Yes, as someone above mentioned, using your existing home to take out a mortgage for funds for a new investment property might pass the buck - but I would argue insufficient nexus between borrowing on your current property, moving out into the new property, then considering the old one which you drew down money from as an investment property and claiming debt.

    Also don't forget that a redraw facility also voids interest deductbility in cases, as opposed to an offset account (somewhat related to money and investment vs non -investment debate).

    Once again given the sums, you would be wiser to speak to a good accountant for some quick advice, than ozbargain. You're dealing wtih potentially dozens of thousands of dollars in just asking everyday (potentially) people on here. Not everoyne here will be financially literate/educated i.e. accountants, financial planners. They may mean the best for you, but heck, for that amount of money, get it right so you don't regret down the track with wrong advice.

  • Deals on Brands on 19/08/2014 - 11:46
    -2

    I was given this advice a long time ago, so not sure if it still applies - so make sure as above you get a good account who is experience in investment property tax laws. And you need to plan ahead.
    Property 1 (current home to be changed to investment property)re-finance this property as you need to get the maximum equity of of this property ASAP. And importantly it needs to be in a separate tax year - than you year you start to have it running as an investment property. There is/was a rule about this from the Tax department - therefore important to discuss with accountant and plan ahead.

    Then use the equity funds withdrawn from Property 1 to buy Property 2(new home PPOR)
    Then that way, Property 1 has the higher loan most interest charged - that can be claimed, Property 2 has no loan or lowest loan.

    Hope this assists, goodluck

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