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FHOG and tax deductions

Discussion in 'Accounting, Tax & Legal' started by alidec, 27th Feb, 2010.

  1. alidec

    alidec Member

    Joined:
    4th Mar, 2009
    Posts:
    9
    Location:
    Brisbane, QLD
    Hi Everyone!

    Not sure if this question should be posted here or in the real estate section? But here goes...

    We're first home buyers, looking to buy our first property this year. We also own a property overseas (inherited) that has about $140k in equity. We are considering using this equity to fund a large proportion of our deposit for aforementioned property, and are also eligible to claim the FHOG.

    It is likely that we will only live in the property that we purchase for six months (a. to be eligible for the FHOG; and b. because my partner's work has him relocating often). Therefore, we will probably rent the property out after the six months and turn it into an IP.

    Our question is, because the loan we're taking out against the overseas property is initially being used to fund our 'first home' we can't claim any tax deductions on it. However, once we move out of the property and start to rent it out, can we THEN start to claim tax deductions against the loan as it will THEN be being used to fund an IP? If we can't do both, does anyone know how you would calculate which would be the better option? (i.e. $7k FHOG or tax deductions on an $80k loan whilst on combined annual income of approx $150k)?

    Thanks for reading this post - hopefully it makes sense!
     
  2. CJ. Wentworth

    CJ. Wentworth Well-Known Member

    Joined:
    9th Mar, 2008
    Posts:
    92
    Location:
    Cairns, QLD
    In short you can "convert" your PPoR into an IP once you start renting it out.

    I'm not going to go into detail since I am hardly qualified to be recommending anything detailed.
     
  3. Rob G.

    Rob G. Well-Known Member

    Joined:
    6th Jun, 2007
    Posts:
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    Location:
    Melbourne, VIC
    Paying interest to an overseas lender, you may have to withhold 10% tax from payments.

    Also, there may be a limit on the gearing level.

    Cheers,

    Rob
     
  4. alidec

    alidec Member

    Joined:
    4th Mar, 2009
    Posts:
    9
    Location:
    Brisbane, QLD
    Hi guys - thanks very much for your responses!

    I'm totally confused now - re: the withholding 10% and the gearing limit - so may have to speak to an accountant, or at the very least the ATO. We have been living in Brisbane for a year and a bit now, and have seen two different accounts - both of whom have not really been able to meet our needs. If anyone reading this knows of an accountant around the Brisbane area that is clued up about investing in property - any recommendations would be great!

    Thanks again for your advice CJ and Rob! :)
     
  5. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    I would suggest that you do both but limit what you use from your O/S property. With your combined income (not knowing assets & liabilities) you would have a high borrowing capacity, so I would go for a high LVR loan. Lenders are more inclined to lend at higher LVR for a owner occupier - you may may need to show genuine savings of 5% over 3 months, but combining with the FHOG and Qld stamp duty exemptions for first home owner (depending on purchase price), the funds to settle may be very low. A $500k property, own funds could be as low as $30k.

    You incur LMI but for an investor it is deductible over 5 years. The loan is a high LVR but paying interest only (use an offset for the first 6 months at least) then once 'converted' to an IP, it is deductible.

    I am no longer close enough to current tax law to comment on the withholding tax (if any) implications but the interest should be deductible. Check with a tax accountant or the ATO. One further factor with borrowing from an O/S property may be FX movements depending on how you are able do this.
    Good luck.
    Greg
     
  6. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    I beleive the 10% withholding tax on interest paid to an overseas investor only applies to investment bodies (such as investment trusts / companies / banks etc)

    However, if you are paying interest to an overseas bank you may have to account for fluccuations in exchange rates - i.e. it may impact you cash flow positively or negatively month to month.

    As you may be borrowing a significant amount, you guys need to also ensure that you have some insurance to protect your income if you can't work due to extended illness or injury etc.

    My company deals with a lot of investors who have both property and loans in Australia and overseas. We are located on the Gold Coast so if you want to visit us please let me know (via private message).

    Good luck!

    SM