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Transfer equity out of Principal place of residence - help!

Discussion in 'Real Estate' started by bigJoe, 19th Aug, 2009.

  1. bigJoe

    bigJoe New Member

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    Hi, hope someone who knows can help me! :)

    I would like to buy a new house in the near future and wish to keep my old house as an investment property. The value of the house is approximately $500,000 and our loan is currently $200,000 (so I have equity in the property of $300,000).

    My question is, can I refinance this loan to 100% of the value of the property and take my equity to fund my new place. I want to do this so I pay the most amount of interest possible on my current home (to become my investment property) so I can claim the maximum amount of interest as an expense. So in essence I would like a $500,000 loan for my current property and be able to claim the interest on that $500,000 as an expense on my investment property.

    Can this be done? Does the ATO allow that?

    Any help would be great, thanks in advance guys...
     
  2. jrc

    jrc Active Member

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    No because your increased borrowings are not to earn income but to pay towrds your new PPOR.

    Strategy could be if your property is owned jointly to buy out the other owner

    so now A & B each own half $250 less mortgage $100 = $150

    You buy out A and borrow $250, so you will now owe $350
     
  3. bigJoe

    bigJoe New Member

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    thanks

    Thanks for that, I thought it would be the case.

    OK, I have another question. Can I withdraw any extra repayments i have made on that home loan before I convert it into an investment property? This would therefore increase the value of the loan to what it actually should be.

    Any help would be great
     
  4. jrc

    jrc Active Member

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    No, because the redraw is not for the purpose of earning income but to put towards your new PPOR.

    Possibly, you could redraw once the property is an IP for the purpose of paying rates, insurance, repairs, interest payments but DO NOT MIX with private funds. See Domjan v FCT

    a brief summary from

    Gadens Lawyers

    Redraw facilities for private purposes
    The question of interest deductibility under a redraw facility was considered by the AAT in Re Domjan and FCT [2004] AATA 815. The taxpayer in that case was held not to be entitled to a deduction for all the interest which was incurred on a jointly owned loan account utilised to acquire three rental properties. As various amounts withdrawn under a redraw facility were used for private purposes, it was held that none of the interest attributable to those redraws was deductible.

    A further argument by the taxpayer, that certain repayments made after the drawdowns were recoupments of the drawdowns, thereby maintaining the deductibility of some of the interest, was rejected. It was held that the repayments were not genuine recoupments of the withdrawn funds since the withdrawn funds were not themselves recovered and repaid. Rather, the repayments came from unrelated sources.
     
  5. jrc77

    jrc77 Well-Known Member

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    But note that if instead of making extra repayments you had been putting the extra money into an 100% offset account you could then withdraw this .... (and the purpose of the original loan isn't changed).

    Unfortunately this needed to be setup up front rather than now!

    Regards,

    Jason
     
  6. C3PO

    C3PO Well-Known Member

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    BigJoe

    Obviously you must seek your own professional advice. From what I know:

    The best way to achieve what you want to do is transfer the property to a trust or similar type of entity, releasing the equity completely. You will have to pay stamp duty, but if you intend to hold the IP for a long period, it can be worth it. You must also remember that only the new entity (e.g. trust) will get the benefit of the tax deductions on interest paid. There are advantages though of having the property in a trust structure or something similar.

    Also think carefully whether you really want to keep the old house as an IP. Sometimes it can be better to just sell your existing home and buy a new IP, removes the emotional attachment to the old house etc and helps you see it purely as an investment.
     
  7. bigJoe

    bigJoe New Member

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    Thanks

    Thanks guys, you advice and help has been invaluable, its certainly given me something to think about.

    What about this scenario? I withdraw all the equity that I can out of the property (The extra repayments I have made on the loan.) and then refinance to a loan with an offset account. I then place all the equity that I have into the offset account. THEN when I am ready to move I withdraw all my equity from the offset account and use that for my new primary place of residence??

    Would the ATO buy that?? :)
     
  8. ashwright

    ashwright Well-Known Member

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    I don't think so.
    The problem is for what purpose you have withdrawan the equity. There needs to be a clear link between the withdrawan equity, and an income producing investment.
     
  9. C3PO

    C3PO Well-Known Member

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    I suspect they would look to your intent. Is your intent to:

    a) reduce the amount of tax you pay, OR
    b) borrow to create an income producing investment

    Because you have already used funds to pay off some of your home loan then I believe that would be seen as having been your intent. If you restructured in the way you have described, it might be interpreted by the ATO as an attempt to structure your finances with the intent of reducing your tax bill. They may not like this.

    If you have equity in the house already and are determined to get a tax advantage, why not simply take out a new loan against the equity in the house, then make your investment using these borrowed funds? You could then invest in shares/IP/funds/something else and get your tax deduction that way.

    In my opinion (again seek professional advice):
    As a general rule, if you intend to one day change your home into to an IP, it's not good policy to pay off any more than you have to of your home loan mortgage. By all means reduce your interest payments using an offset account, but don't pay off principal if you are eventually going to move out and convert your own home into an IP.
     
  10. bigJoe

    bigJoe New Member

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    mmm

    Thanks again guy, seems like I will just have to bite the bullet and accept that it's not a tax advantage to keep my existing property and convert it into an IP.
     
  11. GregR

    GregR Reid Consultants

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    Big Joe,
    I agree with C3PO as to the general rule of using an interest only account and an offset. If you have not set that up originally, it is now costly to restructure. Transferring into a trust, why would you want to incur $22k in stamp duty to do so?. I would run the numbers to see which is a better long term option.

    Tax savings should only be regarded as an added benefit, not the reason for the investment decision. If you are paying a high marginal tax rate, consider pulling some equity out of your existing home and using it to fund an investment property and then go and rent for a period. If your home is in joint names, presumably that property will be positively geared but shared between two, then purchase the IP in the name of the highest tax payer. That may be a better after tax proposition than blowing $22k in stamp duty.

    The other real question to ask is about the quality of your existing PPOR, if it is achieving capital growth and will attract a decent rent yield, keep it. If not, then it may be better selling and buying again with most of the funds used for your new home and perhaps have enough left to fund an IP.

    Good luck