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Renting out own home and loan structure

Discussion in 'Real Estate' started by kas781, 25th Jun, 2009.

  1. kas781

    kas781 New Member

    Joined:
    25th Jun, 2009
    Posts:
    2
    Location:
    Brisbane
    Hi

    We will be moving in a few months and we want to rent out our current home (PPOR). We have a standard variable loan with $150 000 owing and $80 000 sitting in redraw (made as extra repayments over the last 4 years). As we are unable to redraw this amount to pay for our new home (PPOR) and then claim this as interest on our home when it turns into an investment property. Is there any way that we can claim our $80 000 to us for our new PPOR so that we can claim the interest on $150k plus $80k ($230k in total) as a tax deduction. Someone mentioned opening a mortgage offset account and transferring the $80k into this and then we can use this money for the new home and then claim this as a tax deduction.

    Any advice would be greatly appreciated

    Thanks
    Karen
     
  2. C3PO

    C3PO Well-Known Member

    Joined:
    28th Feb, 2008
    Posts:
    102
    Location:
    Adelaide, SA
    According to my understanding it's too late for you to release the $80,000 that you have already paid into the mortgage back out against the property to claim a tax deduction.

    Using a mortgage offset account would have been useful to park the $80,000 in beforehand - if you had done that, you would simply be able to take out the cash to pay for the PPOR, increasing your interest payments and therefore your tax deduction. But having made the extra repayments already I don't think transferring the $80k into a mortgage offset a/c now would satisfy the ATO, you could get yourself into trouble there.

    The only way for you to release the $80k equity now would be to transfer your PPOR to a trust or similar entity, pay the stamp duty, and borrow in the name of the trust. Then the trust or other entity can be geared to the maximum possible, but the tax deductions achieved belong to the trust and cannot be distributed to beneficiaries of the trust. Alternatively you could sell the old house & buy a new IP.

    Obviously seek professional opinion but my suggestions would be:
    a) if you plan to keep your old house long term as an IP, transfer it to a trust
    b) if you plan to keep it only short term, just accept the lower deductions
    c) consider selling your old house and buy another IP, this would allow you to release the equity
     
  3. kas781

    kas781 New Member

    Joined:
    25th Jun, 2009
    Posts:
    2
    Location:
    Brisbane
    Thanks for your response and help. We'll look at setting up a trust. Cheers kas781:)
     
  4. GregR

    GregR Reid Consultants

    Joined:
    13th Jul, 2009
    Posts:
    273
    Location:
    Berwick Vic
    kas781,
    Alternatively you could look at purchasing another IP and simply renting yourselves. If the $80k is used as the seed funding for the IP deposit and costs and borrow the remainder at an 80% to 90% LVR, you may achieve what you want. As the $80k is used to purchase a income producing asset, the interest cost of that $80k becomes tax deductible against income generated. As your first PPOR (or now first IP) would most likely be positively geared, you may have more scope as your borrowing capacity is higher to purchase a higher priced (potentially more negatively geared) property if the capital growth capacity makes sense.

    You will now have 2 IP's potentially growing in value and renting is normally a cheaper solution than being an owner occupier even with low interest rates and relatively high rent yields.

    Selling a property is expensive and a lost cost and incurring stamp duty is also high but it depends a little on what state you are in and whether it is a PPOR or IP so factor in those costs.
    Good luck with the decision.