Hi all,
Mates looking at moving, but keeping his existing house as a rental.
Original house - $350k / paid off $100k into an offset. Valued at $680k.
New house $900k.
Can he refi and make the old house loan (will be a rental) say 95% of $680k? Ie. The value when it first starts earning rental income?
Seems obvious to reduce the loan on the PPOR as much as he can?
Any rules around this changed lately?
Broker says he can only borrow $250 on the old house. ..doesn't sound right to me.
Time for a new broker? Or have the rules around this changed?
Had it valued by an agent. Does it need some form of official valuation?
broker probably isnt wrong it depends on what your 'mate earns' because it comes down to what he is able to 'afford' to repay as well
you have have 1m in equity but if your earning 0 dollars a week no one is going to loan you a cent because you cannot afford to pay back the loan.
never hurts to get a 2nd opinion but doesnt sound wrong to me but i dont know enough info about his situation
ie current income, dependants, current other debt, what the house he has now will rent out at, monthly expenditure etc
the broker and the bank want to 'give your mate' a loan but they need to know he can pay it back - they are in the business of take almost risk and making money
No issue re:financing the loan. Just how it is apportioned out.
It's tricky to convert an existing PPOR to an investment property, and your 'mate' needs to speak to a tax specialist about this.
This is because the purpose of the loan is of relevance when determining whether the mortgage is tax deductible. That is, if you borrow against an investment property to buy a PPOR, the loan isn't likely to be tax deductible as the purpose is to buy the PPOR.
Further, there are possible CGT ramifications too.
Correct, and there may be a possible work-around solution.
If you mate is married then sell the existing property to his spouse - there is no stamp duty on a transfer between spouses. Or there wasn't when I took this course of action.
The spouse that buys the property takes out the maximum possible loan and uses the funds to buy the next PPOR
To not trigger stamp duty there needs to be zero consideration and is simply a transfer of PPOR. And if the wife takes out a loan on that property to pump that money into the PPOR purchase, then it's a loan to buy the new PPOR and the interest won't be deductible on the rental, doesn't matter which spouse does it.
Even if it did work, funnelling transactions between spouses to avoid taxation is skirting close enough to tax fraud that I would want a very good accountant signing it off before doing so.
Strange response because what I suggested was exactly what my accountant advised, and I was not challenged at any stage of the process, by either the Victorian SRO or the ATO
(a) the transfer of title was effected for zero consideration.
(b) the loan was taken out by my spouse with the explicit intention of buying an investment property. Hence the loan satisfied the requirement of funding an income producing asset.
(c) the loan proceeds were pooled with existing joint assets for use in buying the new PPOR
(d) my situation was described to me as not avoiding tax, rather tax minimisation
Best the OP seek their own independent qualified advice.
.
@Tee Rex Arms: "ATO fraud department has entered the chat."
Wouldn't it be great if they did!
I spent 3 years trying to contact the ATO. The auto hang up after 1hr every time saying, they are too busy. Try later.
I then submitted a formal complaint to the Commonwealth Ombudsman. I got a missed call from the ATO. I rang the number and it went to an answer machine. The machine said the person was out of office, and will return in….8 months!
Eventually they called back…and didn't have an answer…
@Ocker: (b) is complete rubbish, is the problem. The loan was not with the explicit intention of buying an investment property, because you'd just transferred the title with zero consideration. The ATO is in no way going to believe that the loan was an investment loan, no matter what you tell your bank or the ATO.
The second you hit (c), it falls apart. You pool the funds together, that doesn't work under tax law. You can't just wash funds around and come out with a new tax structure.
I'd seriously look at getting a less dodgy accountant.
If it helps…he's not married. But defacto.
But the whole smoke n mirrors of the tax system is a shocker!
I thought it is a simple property value : income ratio proposition.
Ie. He bought the place for around $400k. If he rented it back then, he would have got $350 per week (and paid tax on $350) minus the interest on a $400k loan.
Fast forward to today. The property is valued higher, hence a proportionately higher loan (ie. 95% or whatever metric the bank will use). But the rental income is higher, so more tax is payable.
Thanks for this.
"Purpose" and "intention" are BIG words in the tax system.
Unfortunately, I've never found a tax specialist yet (including the ATO themselves). They are useless.
I used to have a subscription to the 'Independent Tax Examinar', that was an awesome resource.
Any tips on where to find someone half decent with this stuff?
They are buying a new house as simply a new place to live. They will get finance regardless how it is structured. But their purpose for tax purposes will need to be something like "to create an income stream from the prior property".
Common sense would be tax minimisation. So I would think a loan for the full value of the property when it is first rented would make sense.
"But their purpose for tax purposes will need to be something like "to create an income stream from the prior property"."
I suspect that the ATO will consider the purpose of getting more finance appears to be in order to be able to afford the new PPOR (without which they wouldn't be able to retain the old PPOR as an IP) and hence the interest on the loan won't be tax deductible. This is the case even if it's secured against the IP.
"So I would think a loan for the full value of the property when it is first rented would make sense."
This comment suggests that your 'mate' needs to speak to a tax specialist before embarking on this endeavour, because your suggestion wouldn't work if keeping the loan tax deductible is the aim…
Any recommendations for a good tax specialist?
I found the advice from each differs wildly. ATO themselves included. He can't be the first one to do it. So must be some case law etc out there already.
I don't think there's any way of extracting the equity in tax deductible way unless you sell it to another entity such as a trust. This will incur stamp duty and transfer fees etc.
If he moves out and converts it to investment property, then he can start claiming interest from that current/existing loan. He can withdraw his offset to maximise interest deduction
He can also get a top up on his loan to tap into that equity. This part of the loan would not be deductible because the purpose of the loan is not for investment purposes. So he should keep the 2 accounts separate and not refinance the whole thing into one account
I'm not an accountant. Don't know your friends specific situation. This isn't advice, but rather just my understanding (which well could be completely wrong).
I'm not an accountant
Then why are you giving tax advice? Because as an accountant, your advice is wrong.
All good. Fully aware all advice on OzB is general in nature. But gives him something to research.
Im happy to be educated and corrected (honestly)
Which part of it is wrong?
I’m so sorry, I misread your post, you’re absolutely right.
And not only were you right, I was a dick about it. I need to get off the internet for a while.
@freefall101: no I didnt think you were. perhaps just a passionate accountant which is , no doubt, an excellent quality to have ;-)
I was genuinely curious that I mis-understood something thats all.
Right…@SmiTTy
So this means if they do the opposite, then it is a better strategy.
Ie. buy the new place as the investment property.
So in the ATO's eyes, borrowing extra against the current PPOR to buy it is all good.
Rent it out for a bit and restructure loans accordingly.
Then move into the investment, and rent out the old PPOR.
I really think they should engage an accountant to play out the different scenarios they are thinking about.
But at the end of the day - the tax deductibility of a loan is dependant on the purpose of the loan. So if its a PPOR today and they change it to an IP tomorrow, then you can start claiming the deduction. If its an IP today and they're claiming a deduction and then changes to a PPOR, they have to stop claiming the deduction. (assuming the loans haven't been contaminated .. and probably many more other considerations).
In your example, without crunching any numbers or thinking through it in too much detail, my initial thoughts would be it probably isn't worthwhile (i could be wrong). You're also adding a bit more complexity with regards to CGT on the new property as it will probably apply due to it being an IP for even a period of time (DYOR ) . Maybe something else to consider, is that banks usually give you a better interest rate on a PPOR loan rather than an IP loan so it makes sense that your larger loan is the PPOR (make of that what you will).
As it has been said many many times throughout this whole post, get qualified advice. I am not qualified nor is this advice.
Cheers again. These thoughts are basically what I was thinking. Should be ok with putting it up for rent first for
a short time re CGT (law of 6/10ths etc). CGT offsets (Lending costs are horrific and will wipe a fair whack of CGT anyway). Been a while since I've done all this stuff, and gave my memory a good refresh. But yep, I've told them to find another broker (or at least ask the existing one to provide some alternate intention outcomes). But seems their current broker is a "always done it this way type". Lending and taxation is sadly an art form, and you need to paint your picture right from the start.
Don't envy kids getting into the property market these days. Tough gig.
Your question has to aspects.
needs to talk his broker or lender
you usually can draw equity out of your property it will require the bank to organise an evaluation