Can we negatively gear our current home?

• 

  tomleonhart on 28/03/2016 - 10:52

  +5

  If you receive rental income for your place, you're gearing it. It's negative gear if your rental income < your expenses. It's positive gear if your rental income > your expenses.

  If you owe around 200k now, even if you remortgage to say 500k, only the 200k portion is tax deductible because the 300k portion will be used to buy a place that you will live in.

  This is why as a broker we ask what the clients want to do in the future. If they are thinking to buy another PPOR home in the future and rent out their existing place, we always recommend an offset account.

  • 

    Hoju on 28/03/2016 - 11:20

    Thanks for the reply much appreciated.

    That's what I wasn't sure of. If the refinanced portion was written against the new home or current one. What happens if you refinance and tell the bank it's for renovations on the current home? (Or if it actually is for renos). Do you then increase the debt whilst giving yourself some diposable cash in hand?

    Part of the issue is that my parents loaned us $200k for the apartment that we now want to pay back and I was wondering if I could refinance the property and give them this.

    • 

      trongy on 28/03/2016 - 12:36

      What happens if you refinance and tell the bank it's for renovations on the current home?

      This is called fraud. If you try to falsely claim a tax deduction (negatively gear) you will also be defrauding the federal government. If you provide your tax file number when you open accounts, the ATO will have access to your the financial details (possibly even if you don't provide the TFN).

      Banks will want documentation of the renovations - e..g builders estimates and bills - as part of the loan approval process.

      Part of the issue is that my parents loaned us $200k for the apartment that we now want to pay back and I was wondering if I could refinance the property and give them this.

      Banks would generally allow re-financing provided you still have sufficient equity and can prove you can service the new loan.

      However, if you turn your current residence into an investment property, you can not use the refinanced portion of the loan as a tax deduction (i.e. negative gearing) unless the new loan is used for capital improvements on the investment i.e. major renovations on the investment property. If that genuinely was the case, the renovations would need to be done after the date you convert your residence into an investment property.

      You cannot freely mix your housing loans to maximise your tax deductions. I recommend you get legal advice before proceeding with a potentially illegal scheme.

• 

  chazfg on 28/03/2016 - 11:24

  if we can remortgage our current home and use the funds to purchase another place, then rent out the old apartment negatively geared.

  As the broker above said, no, you cannot legally withdraw your existing mortgage to fund your new PPoR and then claim full tax deductible on that mortgage.
  Best speak with accountant and broker in person and describe your situation with pen and paper.

  Example of refinance and gearing - Say if the apartment is worth $600k, you refinance your mortgage to $500k and your spent $300k 'investing' on your existing property (i.e. capital works, renovation) then you rent it out, you may claim tax deduction on the money you still owe ($200k) and the amount you borrow to improve the property ($300k). You cannot spend this $300k on a new PPoR because it is not spent on an investment.

  • 

    Hoju on 28/03/2016 - 12:01

    Thanks very much for the clarification.

    So it looks like the refinanced portion can't be used and would be considered a separate loan if not spent on the property.

    Any view on if it is worth discussing the scenario in which we refinance to pay back my parents loan of $200k?

    • 

      chazfg on 28/03/2016 - 14:56

      Worth discussing with your accountant. If your parents give you loan of $200k and you have paper trail to prove and state that you will now owe them interest, the interest you pay to your parents may be tax deductible once the property becomes an IP.
      It may become pointless since your parents will now have to pay tax on the income they receive from the interest you pay.

• 

  Hoju on 28/03/2016 - 13:00

  Thanks everyone for the posts I really appreciate the experience and time put into them.

  It sounds like negative gearing on the current property is not for us. Perhaps in the current low interest climate it's not so easily or wisely done anyway.

  If the opportunity arises I'll certainly get some legal / accounting advice on the specifics of our situation but it's good to have a rough idea of the way it would likely work.
  Thanks again!

  • 

    FiDad on 28/03/2016 - 13:26

    This is precisely the kind of situation where Offset account comes in really handy. If you had the money sitting in offset account rather then paying back principal on your mortgage, you will still pay the same interest but would be able to use the funds in offset account to fund your new PPOR purchase and claim negative gearing on interest on total mortgage amount on investment property. Too late for this property but something to keep in mind for your next property purchase

    • 

      Hoju on 28/03/2016 - 13:29

      Ah yes we actually have an offset with about $100k in it but withdrawing that wouldnt create enough of a debt to create a negatively geared property. Or make much of a dent in a newly purchased property!

      • 

        FiDad on 28/03/2016 - 13:36

        ah ok, seems like you have quite a bit of capital gain on your existing property. I guess best option for you would be to sell this property and then upgrade to a bigger property if you have really outgrown this property

• 

  Euphemistic on 29/03/2016 - 20:02

  Been through this process recently. Ended up selling our old home and buying again. Wasn't worth renting our paid off home out, not enough expenses to claim.

  The only reason to pay down your home loan is that it is not tax deductible, the flip side of that is that capital gains are tax free. You can't have it both ways!

  Negative gearing isn't the be all and end all though. Having a positively geared property is a good investment as you aren't relying on the capital gain at the end to make it a good investment.