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My dream house

Discussion in 'Real Estate' started by angella, 14th Sep, 2008.

  1. angella

    angella Member

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    I am wondering if I can waddle into this forum and ask a few questions;

    I currently own my first starter house and have a small loan for a five acre lot. My plan was to sell the starter house after completing construction of the 'dream house' thereby reducing my housing loan to almost nothing. I am however now wondering how effective this idea may be.

    would I be better to transfer any debt to the starter house and using it as my first IP? how would this affect capital gains?

    should I continue to own it out right and purchase another property using the starter house as equity?

    should I obtain the construction loan as a principal/interest loan continue paying the interest and saving the principal into an offset account?

    I still have two teenage children in their last years of school, but we live a very frugile life and the property enables us to live off the land. The problem is I can't see myself staying in the property for the rest of my life; I am hoping to go interstate/overseas to work for a bit, but would love to have the property and the dream house to return too.

    any suggestions would be grateful accepted
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Unfortunately, you cannot "transfer" debt to a property to make it tax-deductible - it is the original purpose of the borrowed money which determines the deductibility, so increasing the loan after you purchased the property does not make it a deductible expense for that property.
     
  3. Billv

    Billv Getting there

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    Angella

    I'd access the equity from the paid off house and use those funds to build the dream house.
    You then have a brand new property and a considerable loan on the old property.
    Remember though that this loan will only be tax deductible when your dream home becomes an IP.

    The original house although mortgaged will not have any tax deductible loan.
    The mortgage in this instance was used for the construction of your dream home and so it's deductibility will be determined by the use of the dream home. If you are living in it yourself you can't claim the interest, if you are renting it out you can.

    If you want to have a fully mortgaged IP then you would need to sell the 1st property and to purchase a new one.

    Cheers
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You'd also need to make sure this borrowing of equity was clearly separated from any other borrowings (eg set up a separate loan account for the redraw or a new LOC etc) ... otherwise if the dream house does become an IP, there could be questions about how much of the loan is deductible if there has been a mixed use of the funds for private and investment purposes.
     
  5. angella

    angella Member

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    ok thanks fellow food for thought as I am seeing the financial planner tommorrow.

    I feel that I would be better to sell the original property as it is approaching its fifty fourth year and as a result has a number of maintenance issues. I imagine that if I was to do the repairs whilst we were still living in it the ATO would class this as personnel expense, but if the repairs were done to make it more attractive as a rental would they be tax deductable?

    I have been looking at a townhouse for my eldest son who is going to uni next year. Its brand new, in a uni housing belt, I would imagine that it can be depreciatied over a number of years?

    I am starting to feel that prehaps my next goal after construction and setting up a managed investment fund would be two townhouses in different locations funded by a princpal/interest loan. Does anyone have any additional comments?
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Not if it wasn't rented out (or available for rent) at the time the repairs were made - or if the damage/wear occurred before the property was available for rent.

    Also, anything which "adds to the value" of the property is considered a capital improvement, and won't be immediately deductible.

    I suggest you read the ATO's guidebook on rental properties.
     
  7. Billv

    Billv Getting there

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    Yes


    I think its very early days.
    It would depend on your financial situation and the stage of the property cycle at the time.

    Cheers