Tax Implications of Maxing out Owner Occupied Home Loan with a View to Making It a Rental Later on

• 

  Quantumcat on 29/10/2022 - 10:10

  +3

  I'm not an accountant, but I believe that it is the purpose of the loan that determines whether you can claim tax deductions, not the security. If you borrow money against the current house for the future house, it will count for the future house. So anything you've paid into the old house so far is stuck there. You can freely use the offset though as that is just your cash.

  I could be wrong, but that's what I learned when I did the same thing (bought a new house and turned the old one onto a rental).

  • 

    filmer on 29/10/2022 - 11:07

    +2

    I am also not an accountant, but I believe you are correct. They can't refinance and park funds into the offset, then use this as a deposit and it then magically becomes tax deductible. It will only be deductible if that portion is used for income-generating means, which your PPOR is not.

    I will restate, not an accountant, but this plan is not a great one from my knowledge. If they have a 100k loan, refinance 50k and put it in the offset. I would imagine even at this point it actually reduces the amount you can deduct once you convert to an Investment Property. Your loan is 150k, and only 100k of that purpose is for your investment. So while the interest is the same, you will only be able to claim 2/3.

    I would say, that if you're ever going to convert your property to investment all refinances for personal use should be done via a separate split account on the loan so you can pay them off and not pay down the part that will eventually be deductible.

  • 

    wei13 on 29/10/2022 - 11:11

    +2

    I agree this is correct. In short if OP increases his current loan from 60 to 90% LVR, with the extra funds eventually going to OPs new PPR, then interest on that increased 30% loan portion is not tax deductible.

    Not tax advice.

  • 

    deveshwar0 on 29/10/2022 - 12:29

    +1

    Spot on.
    It's the purpose of the loan that determines whether it'll be tax deductible or not.
    Also, once you've paid down an investment loan you can't redraw those funds and claim the redraw as tax deductible unless it was used to make improvements to the investment property, so always park extra funds in an offset and not in the loan.

• 

  cauilfield on 29/10/2022 - 10:13

  Disclaimer: this is not a financial advice;

  If we do this, can we still claim interest paid on the rental loan as expenses come tax time?<<

  If you are renting the property out - this is your rental property. You should be able to claim the interest as expense for the duration of the property being rented out.

  Which in theory means if you had two properties: PPR and IP both with offsets, it is always wiser to keep all your funds in your PPR's offset.

• 

  hentabara on 29/10/2022 - 11:22

  -1

  Been thinking about maxing out the current loan when refinancing to 90 LVR (can go up to 90 LVR without LMI kicking in, due to profession), then parking the funds in the offset account so we are not paying interest, and then using this for a larger down payment on the new property so that its loan is kept low. If we do this, can we still claim interest paid

  • I think should be fine as long as your intention when doing refinance is to keep your house as PPOR and that can be proved to ATO.
• 

  dcep on 29/10/2022 - 12:24

  +1

  There is no reset button , refinance is not a reset , you can reset by changing ownership to your XXXXX (not financial advice).

  Else, once you paid into your loan (not offset) that is it unless you take the funds for investment purpose (not financial advice).

• 

  hdus002 on 29/10/2022 - 14:01

  Thanks very much for all the replies. Will be discussing with the accountant next week.