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Buying a home AFTER investment property

Discussion in 'Real Estate' started by Ms_T, 6th Oct, 2009.

  1. Ms_T

    Ms_T Member

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    Hi All,

    I have an investment property which would currently be worth around $350,000. I owe about $90,000 on it. I wish to buy a home for myself for around $450,000. What I would really like to do is make use of the redraw facility- I can withdraw about $120,000 thanks to some inheritance from a few yrs ago- and use this as a deposit for my home. I want to keep the investment property. Is this possible/ what are the options??

    Cheers
     
  2. jrc

    jrc Active Member

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    You can redraw, but the interest on the redrawing will not be tax deductible if the purpose is to buy a home to live in.
     
  3. Ms_T

    Ms_T Member

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    Wise in hindsight

    Thanks :) I've just read a couple of the other threads on here and it seems I am not the only one faced with this situation! I am kicking myself for not seeking advice at the time- who would think that reducing the size of a loan would be an unwise thing to do!

    I don't want to sell the property at this point in time with prices as they are. Does anyone know of any way around this?
     
  4. jrc77

    jrc77 Well-Known Member

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    Speaking as one who has also been caught by this - it sux! Guess thats what I get for relying on advice from a bank...

    (me) "I'd like an offset account"
    (bank) "We have a no fee redraw option - it's the same thing".
    (me) oh OK.

    You could buy the new place, and then look at "debt recycling" to convert non-deductable debt into deductable debt. There are quite a few posts on the board about debt recycling.

    Regards,

    Jason
     
  5. AsxBroker

    AsxBroker Well-Known Member

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    Was it a teller or a lender who told you that?

    That's very bad advice.
    You should probably get them to stop and set up an offset account.

    Cheers,

    Dan
     
  6. Ms_T

    Ms_T Member

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    Thanks guys.

    If I was to phone my current lender and organise for my loan to be converted to a offset account- and for my current redrawable amount to be put into the offset- would this solve the issue? I realise that this may involve a fee but compared to losing the tax deductibility I would be happy to pay this

    Cheers
     
  7. Billv

    Billv Getting there

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    No, redrawing and restructuring the loan does not make that loan portion tax deductible.

    However if you are not claiming many losses you probably won't get audited so in theory you could get away with it.

    On the other hand, if anyone else knows about this they could dobb you in so I wouldn't do it.
     
  8. jrc77

    jrc77 Well-Known Member

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    It was actually a mortgage "sales person" from a non-bank lender (who no longer exist). The loan has been paid off so no point refinancing now - but now am looking at getting a new PPOR and would have liked to keep the existing place as an investment property. So have the choice of selling current place, doing dodgy transfer (sell place to wife for example) - incurring stamp duty etc, or buying the new place and then debt recycling the interest....

    Regards,

    Jason
     
  9. jrc77

    jrc77 Well-Known Member

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    The drawdown of the current "redrawable" amount would be seen as a new loan and it's purpose determined based on what it is used for - in your case it would ultimately be used as a deposit on the new PPOR, hence interest not deductable. Not only this, you will pollute your existing loan making the accounting a lot harder (after you turn your existing place into a IP some of the loan would be deductable and some not).

    It may be advantageous to get an offset account setup and make any extra new repayments into this rather than direct into your loan.

    Regards,

    Jason

    ps. This is not advice, talk to your acccountant blah etc blah blah :)
     
  10. Ms_T

    Ms_T Member

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    Thanks again.

    I've been looking at threads involving debt recycling but haven't been able to find a real description of it.. could anyone help me out here? Is there a relatively simple way of doing it as I don't have experience with shares and such.

    I really want to make this proportion tax-deductable! It's a significant amount of money..

    Thanks!
     
  11. Billv

    Billv Getting there

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    It can't be done without selling and buying it again
     
  12. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    At the end of the day, you are looking to borrow money for private purposes (PPOR), it is almost impossible to justify the interest on those borrowings as a deductible expense - there are very few circumstances where you can effectively achieve this and it requires careful planning in advance.

    The basic concept of debt recycling is essentially to minimise the amount of interest you pay on non-deductible debt while maximising the relative amount of interest you pay on deductible debt. Direct as much cashflow towards paying down the non-deductible debt while paying as little as possible off the deductible debt (increase the deductible debt if you can - within reason).

    You do this by minimising the amount of principal being paid on the IP loan (ie use IO loan), take all income from the investment property and use that to pay down the non-deductible debt on the PPOR. Any extra repayments you plan on making against the loans should be made against the PPOR loan.

    If you have a redraw facility on the IP loan, you can draw against that to pay expenses for the property (eg, maintenance, improvements) and the interest on the increased loan will be deductible. Avoid using your own (after-tax) income to pay expenses on the IP loan - put it towards paying down the PPOR loan instead. Just be cautious about using redraw on the IP loan to pay the interest costs on the IP loan (capitalising interest) ... get advice before doing this, the ATO might disallow it.

    Note that if there is ever a possibility that you might one day move out of your PPOR and turn it into an IP, then don't use a P&I loan for your PPOR, instead use an IO loan plus offset account - accumulate as much cash as you can in the offset (rent, surplus income, etc) to minimise the amount of non-deductible interest you pay on the PPOR.
     
  13. Ms_T

    Ms_T Member

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    Thank you.
    How about selling to a "trust"?
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    This is quite possible - indeed we did this ourselves.

    We had a property which was our PPOR until we moved interstate at which time it became an IP. We had almost paid off the loan, so there was no deduction to be had if we decided to take some of that money back and use it for personal purposes.

    We already had a family trust set up for other investments, so we had the property valued, got our conveyancer to draw up a contract of sale between us and our trust and sold the property to our trust.

    Because it was CGT free (we rented when we moved interstate and the sale occurred within 6 years of us moving out), we were able to keep the profits from the sale and use them for whatever we liked, the loan on the property was now fully deductible again (more so, since it was refinanced at a higher value than when we first bought it). However, because it was a discretionary trust we received no negative gearing benefits, but that wasn't the primary goal anyway. The costs were stamp duties and conveyancing fees.

    If you don't already have a trust and don't plan on purchasing more assets through that vehicle, it is a rather costly way of holding a single property - and as I mentioned, remember that you don't get any negative gearing benefits with a discretionary trust.
     
  15. Nigel Ward

    Nigel Ward Team InvestEd

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    Good idea Ms T

    Or if you have a significant other who is the "at risk" person they could buy it...
     
  16. jrc77

    jrc77 Well-Known Member

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    Sim (or any accountant types),

    Although no negative gearing benefits, I take it that the loss would be offset against other income within the trust? If the trust ran at a loss for the year, can this loss be offset against future year profits?

    Thanks,

    Jason
     
  17. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes on both counts.
     
  18. JamesGG

    JamesGG Member

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    Just a thought. You could also use the redraw to buy more investments instead of a PPOR, and just rent somewhere for yourself.