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Don't Trust Everything

Jul 18, 2011


My wife and I purchased our former PPOR (in VIC) three years ago for $326,000 plus stamp duty and fees. We borrowed $250,000 to do this and used savings for the balance. On the loan we now owe $204,000. We have paid $27,700 in extra repayments (not in offset). After renos and market growth the house is now worth around 500k. We have now moved out and are renting temporarily interstate (SA). We plan to buy a new PPOR (SA) soon and would like to keep the old PPOR (VIC) as an IP. So my question is all about releasing the equity in the old PPOR but making it tax deductible. I would like to use the money to buy a new PPOR. Is there anyway this is at all possible? I have been told by a broker I could sell the house to a UT with us as the unit holders. My accountant believes this is not possible as the loss would not be deductible. Can you suggest a strategy for this?

The ATO in recent years have cracked down on people trying to claim a deduction for interest on the private portion of the loan. The interest expense must be apportioned between the "deductible" and the "private" portion of the total borrowings. 

So if you use the equity on your existing property to buy a new house to live in then you cannot claim the interest on that additional borrowing even if you rent out the original house that the loan is secured against. Only the portion of the interest that relates to the original loan for the rental property will be deductible.

There are plenty of strategies that real estate agents and mortgage brokers will tell you how to claim the interest on the equity in the old PPOR.  And quite a few of them are valid but  all of these strategies involve transferring or selling your property some way or another.  This means some pretty high transaction costs upfront including legal fees, stamp duty, agents’ commission and maybe even capital gains tax in some instances.  We are taking about tens of thousands of dollars here.

The cost of establishment of a unit trust plus the maintenance of it each year will also cost together with attracting higher land tax.    And any tax losses incurred by a trust, as your accountant correctly points out, is quarantined and not able to be offset against your personal income. 

Any tax savings will take years to recover these transaction costs, if at all. Beware of the savvy mortgage broker you will try to convince you to add these upfront costs to your loan so you “don’t feel a thing”.  Well you will because you will be paying extra interest which is exactly what you don’t want.

You also need to be weary of the taxman getting a whiff of what you are trying to do because they may view your efforts as a “scheme” with a sole or dominant purpose to avoid tax and throw the book at you.

I really wish it was so simple.

 

This article first appeared in the May 2011 issue of Your Investment Property Magazine www.Yipmag.com.au. Copyright Key Media Pty Ltd 2011.

Tags: DeductionsPersonal taxProperty

Author: Mr Taxman

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