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What determines a PPOR or IP

Discussion in 'Real Estate' started by samaka, 29th Oct, 2007.

  1. samaka

    samaka Well-Known Member

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    Legally what is the definition of an investment property. If I buy a property and live in it - but leave my postal address and place of residence at my parents, can I claim it as an investment?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Sorry, no.

    If you physically occupy a property you own (in your own name), then the costs are not deductible.

    The property must be earning you rental income, or (in the case of land) must be in the process of being developed with the intention of earning rental income, or (in the case of a vacant IP), must be available for rent.

    None of these criteria are met for a property you occupy yourself.
     
  3. Billv

    Billv Getting there

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    No but if you rent a few rooms out you can claim part of the Loan interest, part of the maintenance etc.
    Cheers
     
  4. Simon

    Simon Well-Known Member

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    .... and create a CGT liability which may haunt you in later years.
     
  5. Billv

    Billv Getting there

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    This is true and there is also the inconvenience of having to share your house with someone else but in the short term it can help with cash flow.
    Cheers
     
  6. samaka

    samaka Well-Known Member

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    Hmm well my current line of thinking is to:

    Purchase a property with a 100% IO loan + 100% offset. Live in it for a while (for first home owners purposes) - and pour as much of my salary into the offset account. Then I might move back to my parents home (if I can bear it :) ) and rent the property out. Hopefully I'll have enough money in the offset account + rent to cover the costs.

    My incoming salary can then go straight into shares or funds - something that will produce income (Navra?). That income can then go into servicing the loan on the existing property. I can then use the excess money in the offset account + increased equity in property to buy a second IP.

    Then rinse and repeat...
     
  7. Rob G.

    Rob G. Well-Known Member

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    I would prefer a P&I loan whilst a PPOR.

    Every excess dollar repayment comes off the loan principle in the early years and the interest rate is a bit lower.

    So when the time comes, refinance to an IO for an IP purpose, you have more equity and less debt.

    Then redraw some of that equity for positive cashflow investments to offset any negative net rentals.

    Remember, debt is not an asset. Its just that dollar-for-dollar, a deductible debt is better than a non-deductible one.

    Cheers,

    Rob
     
  8. DaveA

    DaveA Well-Known Member

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    yes but if it becomes an IP wouldnt IO be better??? if your dedicated an IO can work just as well as a P&I with flexability which P&I doesnt have...

    id try and get a 5% deposit instead of 100%... LMI will kill you on a 100%, atleast with a 95% loan youd be looking at about 1.9% for LMI
     
  9. samaka

    samaka Well-Known Member

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    Whoops - yeah I will have a deposit - between 5-20%.
     
  10. samaka

    samaka Well-Known Member

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    My understanding is that it functions the same... If I wanted to pay it off completely I just keep adding to the offset account until it's the same value as the loan...

    If I have a P&I then that money that I deposit is out of my control - I have to redraw that equity to get access to it. With IO + offset I could take it all out the next day.

    If I decide to only make interest payments for a few months (to save for a holiday or something) then I still only owe the same amount - if I did this with P&I I'd owe more later on.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I was going to speak out in favour of IO + Offset, but there are some scenarios where this is not ideal.

    In the case of converting a PPOR to an IP, it is better to have IO + Offset so that the entire loan becomes deductible ... but that is less likely to happen (it did happen to me!) than the alternative of drawing out equity to fund an IP purchase.

    For the case of drawing out equity to purchase an IP ... if you use IO + Offset, what you end up with is more non-deductible debt and a non-deductible deposit from the offset account ... not ideal.

    Better to redraw (via a separate facility if you can - to keep personal and investment borrowings separate), the built up equity and use that for the deposit on the IP ... this minimises your non-deductible PPOR loan while maximising your deductible IP loan.
     
  12. Rob G.

    Rob G. Well-Known Member

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    I read the original scenario as you will be initially living in it for a few years (PPOR) and not performing a debt recycle plan.

    In which case non-deductible debt pay-down as fast as possibe using P&I with excess payments is the plan.

    If you are debt recycling your PPOR loan, periodically withdraw the equity repaid using another investment-only (IO) sub-account to invest.

    When the PPOR eventually becomes an IP, refinance to IO loan.

    That's what I reckon anyway ...

    Cheers,

    Rob
     
  13. Simon

    Simon Well-Known Member

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    Get the best of both worlds.

    Go IO with offset for your PPOR and IO for IPs.

    If you want to use funds for personal use then draw from the offset.

    If you want funds for investment use then you have two options:

    * Create an LOC if you have enough equity. This loan will be deductible.

    or

    * Move sufficient money from the offset into the PPOR loan. This is simple using online banking. Then draw it out via a split loan or an LOC to spend on your new investment. This loan is now deductible.

    Cheers,
     
  14. Rob G.

    Rob G. Well-Known Member

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    I really prefer a P&I, especially with an offset for cash buffer/living expenses, but pay down owner-occupier debt asap.

    Do not leave it on hand but set-off by the private offset account if it is substantial.

    2 points:

    1. Leaving the PPOR debt IO and full value while having a very large "savings" in the offset may make the Commissioner ask just what is the actual debt used to finance the house acquisition AT THE TIME IT BECOMES AN IP

    2. You have entered into a contract to acquire a private asset. This contract continues for some years (e.g. 5 yr IO then 20 yr P&I).

    When it becomes an IP, the loan interest is deductible - but if something goes wrong & you lose the property with a shortfall that you cannot repay - UH OH !!

    The position of the Commissioner is given in TR 200/2 & TR 95/33, your liability ORIGINALLY arose from a private loan contract !!!

    If you in fact borrow against the property (or refinance) for the purpose acquiring or improving the property to earn assessable income (i.e. IP) then the contract was entered into to earn your assessable income.

    Then if it all falls down and you are stuck with a debt but no asset, you can keep claiming interest deductions long after the end of the exercise (e.g. FCT v Brown).

    Those rulings are not nice reading, but I don't have deep enough pockets to take the Commissioner to court to find out if he is correct.

    Instead, I would rather pay down a P&I (with offset for cash living arrangements provided fees are not higher) then redraw for a separate deductible loan in some form.

    That's my personal opinion.

    Cheers,

    Rob
     
  15. coopranos

    coopranos Well-Known Member

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    I think the original question was regarding a PPOR that was intended to be rented out after a period. In this instance any money you pay off the PPOR using a P & I loan is a lost deduction.



    Doubtful the commissioner would have an argument. How you choose to finance anything is entirely up to you.

    so you are suggesting that if you somehow lost the property but the loan remained intact, you could no longer deduct the loan?
    #1 how on earth could this ever happen? The lender has first rights to the property, and they will sell it to clear the loan.
    #2 If you get to a situation where your bank forecloses on your loan, you have bigger problems than a non-deductible loan. Chances are you would probably have to go bankrupt anyway.
     
  16. samaka

    samaka Well-Known Member

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    I don't know enough to say either way whether that is a problem (but I'll research it!). However, when it comes time to convert the PPOR to IP, surely I could take the savings in the offset account and pay down the principle of the loan... and later redraw on a line of credit to invest elsewhere.

    Not to sound rude - but I don't understand. What do you mean by 'something goes wrong & you lose the property'? If I owe X dollars on a loan - why would it matter whether it's P&I or IO?
     
  17. Rob G.

    Rob G. Well-Known Member

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    Nothing wrong with IO vs P&I, just if you have an enormous encumbrance on your PPOR at the time it becomes an IP (purely for private reasons), then sure the interest becomes deductible while the assets are used for a taxable purpose - but the original private loan contract did not arise for a taxable purpose.

    e.g. PPOR & mortgage, after a few years you temporarily go overseas 1 year & rent out the house. Interest is deductible. Original wiring fault causes house to burn down (no fault of renting) and you have no insurance & no income to pay off oustanding loan. Why should you continue to claim tax deductions for future years on your mortgage since you only got it to acquire a private residence that happens to be rented at the time you lost it.

    However, if you had mortgaged/redrawn using the property as security to use the funds for a taxable purpose, then if you lose the home - you look to the purpose of the borrowing. So if you cannot repay the loan principle and cannot earn further income then you can continue to claim interest deductions on the loan you are stuck with (FCT v Brown).



    I still reckon pay down owner-occupier debt & redraw for a taxable purpose. That way, the redrawn part is tax-deductible no matter what happens as the reason for the redraw was to earn assessable income.

    That is the usual scenario, private loan P&I, offset for private working buffer, LOC etc for redrawn deductible sub-accounts. Pour as much as you can afford into the P&I then redraw on a separate investment account.

    By the way, I could attack a LOC on a similar argument - the Commissioner regards these as 'rolling refinancing'. Better to actually have a separate loan contract that commits you for a term to give relief if you end up in Brown's case. Otherwise a LOC could fall foul of FCT v Riverside Road Pty Ltd.


    Cheers,

    Rob
     
  18. samaka

    samaka Well-Known Member

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    Ah now I get your point (and the how it applies to a LOC as well).

    As a side question - how often do people get their property re-valued, then draw out the equity? Every 6 months?
     
  19. Rob G.

    Rob G. Well-Known Member

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    There are usually costs of valuation & renegotiation. Also the bank requires a minimum increment. So basically, when you think there is enough increased equity to be worth the exercise.


    Incidentally, another reason I don't like big balances of private money in offset accounts - the 'all monies' clause on the mortgage gives the right to the bank to set-off against your other assets if you get into trouble.

    e.g. Mum & Dad make you an interest-free loan for a couple of years. You put it in the offset account so it effectively pays down mortgage interest but is always available for working capital & private use. If the bank forecloses on the mortgage - can it grab your parents' money ? READ THE CONTRACT !!

    Same goes for multiple secured assets under the one lender, they might be able to claim the equity in your other assets in satisfaction of an unrelated debt.

    Cheers,

    Rob
     
  20. samaka

    samaka Well-Known Member

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    Could you ball park it for me? :p Hundred or thousands?