Refinancing PPOR to Buy Investment Property

focus123 on 13/03/2025 - 20:48

Hi Folks,
Got a question to OzB tax experts.

The loan of our PPOR is about 225k, its market value is about 1M.

We're thinking of drawing 200k (moving money out as a purchase cost instead of using it as a security on loan) from the equity of PPOR and using that money to purchase an asset that is supposed to produce income(aka an investment property). This will increase the loan amount of the current PPOR to 425k (225k + 200k) and the new loan on IP will be around 800k.

From what I read so far in forum posts, the redrawn 200k + the new loan of 800k will be eligible for negative gearing tax deductions as long as this structure stays unchanged.

I have this question,
What if in a few years time, we decide to swap the properties by converting the new IP the PPOR, and the current PPOR into an IP?

From what I understand, the 800k Loan will not be tax deductible from the day we convert it into a PPOR.

What will happen to the deductibility of current PPOR (which will be converted to an IP)?
1. Will I be able to claim tax deduction of full 425k loan (225k + 200k)
2. or Will I only be able to claim tax deduction on the lowest balance of the loan which is 225k?

Financial

Comments

  • dtc on 13/03/2025 - 20:57
    +7

    No 2. You can only deduct the amount used to buy what is now the IP (formerly the PPOR). What the loan is secured against is not relevant.

    Even with stamp duty, you may be better off selling the IP (formerly PPOR) and paying down the now non deductible loan and then borrowing to invest from new. But that’s a decision based on the numbers at the time

  • GuyfromMelbourne on 13/03/2025 - 21:20
    +3

    Purpose of loan is the deciding factor not the security.

  • jv on 13/03/2025 - 21:21

    Got a question to OzB tax experts.

    Tax advice is not free…

  • Wiadro on 13/03/2025 - 21:45

    g o o d l u c k

  • MS Paint on 13/03/2025 - 21:46
    +1

    $1m - no thanks. Up to you though.

  • freefall101 on 13/03/2025 - 22:55
    +2

    Are you really sure you want to go with what the internet tells you on buying a $1m asset, just to save paying an accountant a few hundred bucks?

  • tiredaccountant on 13/03/2025 - 23:01
    -1

    I'm not sure why you'd redraw funds on the loan rather than using your equity as security - you're just making your life harder doing things this way.

    In your first scenario the interest on the $200k, plus the interest on the $800k would be tax deductible. In that scenario you have $225k non-deductible debt and $1m deductible debt.

    If you flip the properties from PPR to IP and vice versa, you'll then have $1m non-deductible debt and $225k deductible debt.

    The most tax efficient way to do this would be to refinance your PPR now and get an offset account. Take your IP loan as interest only (also with an offset) and pump the difference between the IO and P&I repayments into your PPR offset account (thereby minimising your non-deductible debt). When you do the switcheroo, pull the money out of the offset on property 1 and put it into the offset for property 2.

    Just to be clear - redrawing funds rather then using equity as security won't make any difference in terms of LMI. And remember that you can only apply the main residence exemption to one property at a time - the 6 year rule doesn't work if you take up another main residence.

  • brad1-8tsi on 14/03/2025 - 08:43
    +2

    It's called debt recycling and you need to structure the PPOR loan so that it is 2 separate buckets. One bucket is what u owe on the PPOR now and the other is the redraw for the IP.

    This is so that you get a separate statement for each bucket.

  • Seraphin7 on 14/03/2025 - 08:57
    +1

    From what I read so far in forum posts, the redrawn 200k + the new loan of 800k will be eligible for negative gearing tax deductions

    That is correct.

    From what I understand, the 800k Loan will not be tax deductible from the day we convert it into a PPOR.

    That is correct.

    1. or Will I only be able to claim tax deduction on the lowest balance of the loan which is 225k?

    In effect, yes. You will need to keep detailed records of all of this (effectively down to individual transactions) to maintain a running balance of which portion is which.

    I'm not an accountant and this is not tax advice, but it is similar to a structure I have going.

  • vince088 on 14/03/2025 - 17:41

    maybe sell the PPOR as it has no capital gains tax before you move into the IP ?
    Use that money to buy another IP and or pay down new PPOR

  • focus123 on 15/03/2025 - 15:40

    Thank you all for your responses. it seems it is better to use the available equity of current PPOR to buy ETF as it gives flexibility to manage the tax deductibility.

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