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Is refinancing a solution for PPOR to IP?

Discussion in 'Accounting, Tax & Legal' started by kam_19, 10th Nov, 2009.

  1. kam_19

    kam_19 New Member

    10th Oct, 2009
    G'day Friends.:)

    This is my first post.

    So far I have been reading the forums and I must say this is a great knowledge base. There is so much information available.

    Well I have been reading the forums related to converting the PPOR into IP and now I understand that any new borrowing need to be for investment purposes for interest on this borrowing to be tax deductible.

    In my situation, my PPOR is worth $350K and the loan balance is $100K.The Original loan was $225K and I have $120K redrawable amount available.(yeah, it was a mistake for not setting up the offset account and now I regret it. I have been making a lot of extra repayments in last 3 years)

    If I want to buy a new PPOR and convert the current PPOR into IP, what are the options available?

    I understand that if I redraw from the loan account to pay the deposit and stamp duty for new PPOR, the interest on this borrowing will not be tax deductible.

    But is refinancing a solution?
    Can I refinance the existing loan to 80%LVR Investment Home Loan ($280,000) and use $180,000 (as deposit and stamp duty) to buy a new property (value $450K)?
    Is the interest on investment Home Loan in this way tax deductible?

    I don't want to sell the current PPOR now because I believe it will appreciate well in near future.

    I have been reading that setting up a trust can also be a good solution. Is there any link to read more about this trust and how it works, etc.?

    Thank you very much.

  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    There are lots of discussions on trusts already - perhaps do a search of the forums.

    Back before I got into investing, we paid off our PPOR completely and it became and IP when we moved interstate ... we ended up selling it to our family trust which allowed us to extract the equity and it made the loan for the property fully deductible again (deductible to the trust, not to us). We did pay stamp duty on the sale - it wasn't cheap.

    The trick with trusts is that they are expensive if you are only ever going to have one or two properties ... and you don't get any negative gearing benefits with your IPs (losses are quarantined within the trust).

    It's a pretty complex topic.

    I'm not completely sure about the refinance question - I'd have to check what the ATO's approach is when dealing with refinanced properties and deductibility.
  3. Rob G.

    Rob G. Well-Known Member

    6th Jun, 2007
    Melbourne, VIC
    Redraw or refinance does not change the legal pricinples used.

    Purpose/use of the borrowed money determines deductibility.

    So if the refinance is to secure your new PPOR, then this is a private use.