Need to refinance to convert PPOR to IP??

Hi All!

I have been advised by my financial planner that I should refinance my current PPOR P&I loan (150K debt with 80K redraw available) to a Line of Credit type loan(Interest only).

He purports that we cannot legally draw out all available redraw when it comes time to convert our PPOR into an IP (say in 2 years time) in order that we get maximum tax benefits. ie. If we have 150K debt and 80K redraw, just before we convert to IP, we are no legally allowed to transfer out the 80K and make the debt 230K. Then, claim tax deduction on interest for the full 230K. Hence, he proposes that we refinance & restructure our current 150K debt now (without being able to legally draw on the 80K redraw).

Even if this is true, I don't see how a LOC loan structure will solve the issue, isn't it exactly the same as a redraw? Is there any reason why I can't just use my existing loan as an investment loan later on down the track, redrawing all available redraw and maximizing tax deductibility? Though I realise that P&I is not necessarily ideal for an investment.

I need a second opinion to make sure that i'm not just being shoved another sale! Please help!

 

Hi Vinnie

Your FP is correct. There's a few threads on here dealing with similar questions if you do a search.

The ATO goes back to the purpose of borrowing funds to determine deductability. Once you pay down the debt you can't reverse the situation and increase the borrowings.

You could borrow against the equity of the property and use the resulting LOC funds for investment purposes and those would be deductible. Or you could sell your property to a Trust and wear the stamp duty costs on transfer, and borrow 90% or more, and the Trust (if HDT) would have negative gearing benefits attached.

All a bit complex. Personally I'd accept the less than optimal deductability and do what your FP suggested - costs too much money to sell a property (upfront and changeover costs, lost opportunities etc)

Cheers
Carl

 

TR 2000/2

Leaving aside the fact that generally IO loans are better:

Redraw $80k for new car & holidays, etc.. = mixed purpose loan

Redraw $80k for purchasing shares, capital improvements to IP, etc.. = Deductible

The use of the money decides the deductibility.

The extra hassle with a LOC is that the Commissioner often regards it as a refinance every month. So if you have sold down some investments and not replaced them or repaid part of the loan with the proceeds then the deductible percentage of the loan reduces.

Cheers,

Rob

 

Vinnie,
I am with you on this.
A LOC will not improve your situation but an OFFSET account will
The problem though is that you have already repaid $80K
so by pulling it out and increasing the loan it could be seen by the ATO as tax avation (If the funds are not used for investment purposes).

The loan you currently have can be used to finance a future IP purchase
so lets say today you convert your PPOR to an IP and you leave the loan as is. You can only claim the interest on the loan balance leaving the $80K in.
6 months later you find another IP.

You can then use the $80K (or part of it) as a deposit for the new IP.
It's all doable with your existing loan. The difficulty is separating the interest that will be claimable against each IP but your accountant can do that.

I have 1 loan I've used for 3 IP's and my accountant has allocated a % figure to each IP so at the end of each year we split the interest costs in 3.

Cheers

 

Hi Vinnie

I can't see the point of a LOC either. If the property is going to be an investment I would suggest you just change the $150,000 to an interest only loan. Maybe the other portion, the $80,000 could be set up as a LOC - but this should only be used for deposits and expenses on this and further investments.

Having a LOC on an investment property would be a tax disaster if you were to pay all you wages etc into the loan. The deductible portion would rapidly decrease and you would be left with a large loan with none of the interest deductible.

 

Advice on converting 2 PPORs to IP eventually

Sorry to pick up this thread again but came across it today and my partner and I are in somewhat of a similar situation. We will soon see a FP for detailed advice, but at the moment I am trying to dig up some research for my own understanding.

I am 25, engaged, my partner is 31 and combined we earn roughly 148K a year (potentially more as I am contracting and can earn more if I work more hours).

We don't live together, but each own our own properties which we live in. Property A, value = 300k with 113k owing but 40k in redraw - no offset facility
Property B, value = 500k with 135k owing and 44k in redraw - offset with around 127k (100k is only there temporarily, so technically there's only 27k).

At the end of next year, we are planning on moving into B and rent out A. We will then save for another year to hopefully build a big enough deposit for another house. At that stage, our plan is to rent out both A and B, using the money from redraw/offset and our savings to purchase a new PPOR.

Since we are both living in PPORs at the moment, interest is not deductable so we are putting in as much income as possible into redraw/offset to reduce interest. However, as we wish to someday convert both PPORs into IPs, the forums have indicated redrawing from these loans to purchase a PPOR is not legal... Does that mean we should now withdraw everything from our redraw accounts and put in ING? That doesn't sound tax effective at this stage because we are saving more by leaving them in the loan than what we would earn in ING after tax.

Sorry for this lengthy post, I've been reading these forums for a while and this is my first post. Still slightly confused about the whole debt recycling thing and how LOC will help in this situation.... Any assistance will be appreciated. Thanks

 

Hi

Redrawing now technically won't help. You have already paid the loan down so deductibility of the interest on the redrawn purpose will depend on the purpose of the new borrowings - if this case to invest in an ING account (negative gearing with no hope of a capital gain!!).

 

>However, as we wish to someday convert both PPORs into IPs, the forums >have indicated redrawing from these loans to purchase a PPOR is not legal...

It is perfectly legal - just not legal to then claim the interest expense as a tax deduction.

If you structured it so that both your existing loans were interest only with offset accounts and you put any extra replayments into the offset accounts then when you turn the properties into investment properties you can use the proceeds in the offset accounts for any private purpose (ie. buying your new PPOR) without affecting the tax deductability of the loans.

Drawing down on the loans now and putting the money into ING doesn't achieve anything other than losing you money.

Regards,

Jason

 

Yes thanks for correcting me - I meant it's not legal to claim the amount withdrawn from redraw as deduction upon changing from PPOR to IP.

I did think moving the funds to a savings account would have been pointless because then we would be paying more interest on the loan as well as tax on the savings! That is why we've been putting everything in the loan/redraw, which is now disadvantaging us from having more deductable amount when the properties become IPs.

Looks like the only solution will be to restructure the loans... last time we looked at changing the loan to have Offset, there was a whole stack of fees and higher interest rate which at the time, we didn't know would be worth it given we may have to refinance within the next year or two. I will have my partner contact his lender again to discuss as my loan currently already has Offset and I will just change to IO.

Thanks for the responses