Interest deductibility in this example

a question for all the accountants on the forum

my PPOR is paid off but I have a LOC which I have drawn down for investments purchases eg property, managed funds, etc. as such all interest charged on the LOC is deductible. the loan is with one bank, WBC

we recently purchased a knockdown on which we are going to build a new PPOR. This loan is with another bank,CBA.

once we have completed the build , we will sell the current PPOR and move into the new one.

to do this, we will need to payout the LOC with WBC. if is possible then to restructure the loan with CBA into 2 components, one for home loan and one for investments purposes allowing interest to remain tax deductible (my mortgage broker has no problems splitting the loan)?

To use some numbers as an example:

WBC loc 500K
CBA loan 800K

sell current PPOR for 600K (pays out 500k WBC LOC with 100K left over)

new CBA loan 800K with 700 drawn down (paid down 100K from ppor sale)

split CBA loan as follows:
home loan 200K - non deductible
investment loan 600K(of which 500K is drawn down - old WBC LOC debt) - deductible

thanks
Gazza

 

You can refinance your investment loan, but the Commissioner will look to the purpose of the refinance to see if things have changed.

Where you are merely changing lenders and still have the ongoing investments then this is normally OK.

However, how you do it is important.

Do not "PAY DOWN" the LOC with proceeds from the sale of the PPOR.

Otherwise any redraw not used for investment purposes loses its deductibility.

Arrange a separate borrowing proceeds to pay down the LOC.

Also note the peril in Hart's case of capitalising interest on a split loan arrangement whilst directing all income to paying down the PPOR.

Cheers,

Rob

 

thanks Rob - will pass on the info to my mortgage broker