Convert PPOR home loan to IP loan ..

[bennido]

I plan to move houses in a few years time but would like to keep my existing PPOR and convert it to an IP.

However, I am not sure what is the best way forward in terms of ensuring that the loan (on the existing PPOR) is tax-deductible when it becomes an IP.

My PPOR home loan is a “salary account” home loan product. My salary is deposited straight into the home loan, I spend with my credit card and then redraw money from the home loan to pay the credit card bills.

When it comes time to move into a new PPOR, there will be a significant amount of equity in the property which I would hope to redraw to put money into the future PPOR loan.

The problem is (from what I have read here) the existing “salary account” loan is not tax-deductible (even if my PPOR becomes an IP) as the loan was taken out originally for personal purposes and not for investment purposes. Is this correct ?

Is there any way that I can restructure my loan so that my existing PPOR loan can be tax-deductible when it becomes an IP later on?

Thanks in advance !

 

[Qlds007]

Couple of quick things you might want to consider would be:

1) Switch the loan to interest only.
2) Link a 100% offset account to the loan and have your salary and any other incomes deposited into the offset account.

There are a couple of other strategies down the track you could look at but that would be a good starter.

 

[Rob G.]

Consider paying your salary into an offset account and converting your mortgage to IO.

GOOD NEWS is that when your house becomes an IP, the interest on the money borrowed to finance the house becomes deductible.

BAD NEWS is that each time you pay salary into your account and then redraw for a private purpose reduces the amount that represents original money borrowed to finance the house.

This is a horrible calculation that your Accountant should do to work out the remaining part that represents the funding for your investment.

Consider paying your salary into an offset account and converting your mortgage to IO.

All this is very general and you should get specific help from an Accountant.

Cheers,

Rob

 

[Qlds007]

Rob i see great minds work alike.....

 

[bennido]

Couple of quick things you might want to consider would be:

1) Switch the loan to interest only.
2) Link a 100% offset account to the loan and have your salary and any other incomes deposited into the offset account.

There are a couple of other strategies down the track you could look at but that would be a good starter.

Thanks for the reply guys.

So does that mean that if I switch to an IO loan with offset now the whole loan will be tax deductible when I convert the PPOR to an IP ?

For example, say my current loan is $200,000 and I have $30,000 as redraw (i.e. owe $170,000). And I convert it to a IO loan of $200,000 with $30,000 in an offset account.

Would I be able to claim interest on the full $200,000 as a tax deduction later on ?

Thanks again !

 

[Rob G.]

Generally ... no

With a P&I loan, the payments are a blend of interest expense and a part repayment of the loan.

In the early years, most of each payment is interest so the outstanding loan does not reduce very quickly.

However, every additional dollar above the prescribed monthly amount is actually a paydown of the loan principle according to the ATO.

Therefore even if you redraw these excess payments for living costs and your outstanding loan increases again - this is ignored for tax purposes and the original smaller amount is treated as the amount borrowed to purchase the house.

Before long, you "borrowing" to finance the house will be significantly reduced even though your loan may be quite large.

As I mentioned, this is a nasty little calculation best left to your Accountant.

Cheers,

Rob

 

[bennido]

<sigh> ... it looks like I dug a darn complicated hole for myself by having the wrong loan structure from the start. It might be better off just selling the current PPOR when I decide to switch to save me the hassles.

Anyone else here that has gone through the same problem in the past ?

What actions / path did you take ? Please share your stories .. thanks !

 

[bennido]

However, every additional dollar above the prescribed monthly amount is actually a paydown of the loan principle according to the ATO.

Therefore even if you redraw these excess payments for living costs and your outstanding loan increases again - this is ignored for tax purposes and the original smaller amount is treated as the amount borrowed to purchase the house.

Before long, you "borrowing" to finance the house will be significantly reduced even though your loan may be quite large.

As I mentioned, this is a nasty little calculation best left to your Accountant.

I've been re-reading Rob's response and I think it is starting to make sense now.

To confirm my understanding, lets say ...

Original loan - $200,000
Current balance - $150,000

If I convert the loan to an IO only + offset account NOW and use the offset account for my incoming/outgoings, the loan of $150,000 will be fully deductible as an investment loan when I convert the PPOR to an IP ? Right ?

If this is the case, this might be a viable option for me. Too bad about the $50K already paid off and no sense redrawing it and clouding the matter further. I can just take it as an expensive lesson learnt.

 

[Qlds007]

Ben

Your understanding is correct.

 

[tobe]

The other way to look at it is a $50k buffer for hard times, or $50k towards the next investment purchase. Its good to have equity. Your situation isnt as tax effective as it could be, but there are many tax years to come where it will get better.