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Converting PPOR into IP

Discussion in 'Real Estate' started by dynasty007, 25th Dec, 2009.

  1. dynasty007

    dynasty007 Member

    Joined:
    24th Jun, 2009
    Posts:
    20
    Location:
    Melbourne, Vic
    Hi All,

    I am a 25 yo investor who has 1 IP and is now looking at completing my cert 4 in building & construction in order to obtain my builder's license.

    I wish to owner build a new home for my Mother & I, but keep her existing property (fully paid off) as an investment. However, since there is no money owing on the property I realise that nothing can be claimed. Is it possible to redraw the equity in our current PPOR to fund our new home and rent the old PPOR which would then have a loan attached to it?

    If it is not possible, are there any other suggestions which would be useful for my situation or do I have to sell our current PPOR?

    Thanks,

    Mike.
     
  2. jrc77

    jrc77 Well-Known Member

    Joined:
    26th May, 2008
    Posts:
    147
    Mike,

    As you seem aware the deductability of interest on borrowed funds is determined by the purpose for what the money is borrowed - so if you borrow money to buy the new PPOR then the interest is not tax deductable. As one who is in a similar position there are three options that I know of to consider:

    1. Assuming the house is in your Mum's name, she could sell it to you (at full price, you borrow the funds, set it up as an investment property - maybe after living in it for a while to claim FHOG) then interest is deductable (to you of course - not your Mum). Assuming of course this is your first property you could use the FHOG and stamp duty exemptions. Keeps property in family, but not in your Mum's name. Cash received in your Mum's name could then be used to purchase new PPOR.

    2. Do 1 (above) and then in a year or two sell it back to your Mum - will incur stamp duty and legal fees - but then she could borrow the money to buy it off you and then interest would be tax deductable.

    3. Your Mum buys the new place (borrowing the funds). Interest on new loan is not tax deductable. She then uses a debt recycling strategy to slowly convert loan to deductable debt. Search forums for debt recycling.

    4. She just sells current place, buys new PPOR with cash received and then if desired buys a seperate investment propery. Incurs selling costs on current place, and buying costs on new investment property (including stamp duty) - but is clean and less complicated.

    Note there are things that could be done to avoid the scenario if the original loan was setup with an offset account and instead of making extra repayments into the loan, the money is simply placed in the offset account. In this case if you withdraw the money from the offset account the original loan purchase isn't changed (so you could use it to buy a new PPOR) and the interest on the original loan is tax deductable (assuming the house purchased with it is an investment property). From what you have said it is too late for this now.

    I would be interested to see if anyone else has any comment - as I said I am in the same situation myself.

    Regards,

    Jason
     
  3. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    No you shouldn't redraw on the loan to build the new PPOR because the interest won't be tax deductible.

    Selling is an option but if you want to keep the old house I'd get a loan and buy it off mum.
    Mum then uses the money the build the new house.
    The interest on the loan on her old place which is now yours is tax deductible.
     
  4. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    Mike,
    The action to be taken depends on what you want to achieve.
    If your mum wants additional taxable income, then by all means she can (if possible) obtain a loan against her existing PPOR to fund or part fund the new property owned by you both (ownership needs to be considered re FHOG, long term intention etc).
    Her now previous PPOR is rented out, she has a taxable income less normal investment costs, rates, taxes, depreciation etc, which may be a benefit depending on her other income (if any).
    The interest on that loan loan is not tax deductible if used in this way but may be at a cheaper rate than you can borrow for the new construction loan required.

    The option by Billv makes sense as well but incurs stamp duty.
    Good luck
     
  5. dynasty007

    dynasty007 Member

    Joined:
    24th Jun, 2009
    Posts:
    20
    Location:
    Melbourne, Vic
    Hi All,

    Thanks for your responses and sorry it has taken me so long to reply I have been offline for a while.

    It all seems a bit complicated to debt recycle and I don't like the idea of buying the property off Mum and incurring Government charges (I am not a 1st home buyer) so I have decided to rennovate the house and continue to live in it and simply build a spec home for investment purposes. This is less messy and a good way to venture into building without the worries of trying to get everything perfect since you are building to occupy!!

    Mike.